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Dollar Rally Continues Post-FOMC as BoE, SNB, Banxico Draw Contrast

Dollar Rally Continues Post-FOMC as BoE, SNB, Banxico Draw Contrast

John Kicklighter, Chief Strategist

Talking Points:

  • FOMC hike is the second strongest - second to the Brexit response - in 14 months
  • Breaks from EUR/USD and USD/JPY face hurdles in liquidity, GBP/USD and USD/CAD moves are perhaps better shaped through technicals
  • Rate decisions from the Bank of England, Bank of Mexico and Swiss National Bank reiterate the two speed financial track that undermines risk taking

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The Dollar's post rate hike charge continued through Thursday's session to mark the second strongest short-term rally - after the Brexit rally - in 14 months. With the Greenback scaling 14-year highs and major technical levels still a ways off, it is momentum versus liquidity to determine reach. There is little doubt that the second rate hike from the world's largest central bank has enabled the rally, but there may be more at work leveraging the advance of a currency that has priced more than this most recent move. Restraint from Fed Funds futures and Treasury yields seem to curb this active driver. Yet, as can frequently be the case with the world's most liquid currency, trouble with some of its most liquid counterparts may have added to its own drive.

For central bank rate decisions, neither the Bank of England (BoE) nor the Swiss National Bank (SNB) altered their considerable stimulus efforts. However, both groups offered a troubled assessment for their respective economies, inflation backdrop and currencies. For its most prominent counterpart - the Euro - the close of the EU Summit ended with assurances that Brexit negotiations would not take place until after Article 50 was invoked while officials remained at odds over progress on Greece's rescue debt payout. It can take a village to lift a stretched currency. Meanwhile, those trying to counter the Fed and Dollar at its own game - as few as there are - continue to experience the weight of a financial system and economy the size of the United States'. The Bank of Mexico (Banxico) announced a larger-than-expected 50 basis point hike Thursday, but the Peso certainly hasn't turned the tide of USD/MXN's drive to record highs these past few months.

On the risk front, the S&P 500 and other representative benchmarks have not faired so well through the progress in monetary policy. The US equity benchmark carved out an 'inside day' technical pattern with Thursday's session fitting within Wednesday's FOMC drop. US assets have been given an additional shine with the hike lifting relative return of local assets. Yet, that modest increase in spread is only attractive so long as the reach for return remains extreme - there is little other reason to scramble for such restrained returns. For the more extreme on the speculative curve, the pressure is even greater. Emerging Market and high-yield assets continue to outpace in the retreat. With sentiment souring and the liquidity drain of year-end trading conditions approach, adjust expectations of what represents the best trading approach moving forward. Is it long-term trends on already significant runs or short-term drives on volatility with liquidity fading into the end of the year. We discuss the top themes and dichotomous market conditions in today's Trading Video.

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