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Webinar: USD, Stocks at Highs - What to Watch into Year-End

Webinar: USD, Stocks at Highs - What to Watch into Year-End

James Stanley, Strategist

Webinar: USD/Stocks At Highs – What to Watch Into Year-End

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- In this webinar, we used price action to take a big picture look at the recent USD/U.S. Equities rally that has propelled both markets to significant new highs. As election euphoria appears to be calming a bit, we tried to look around-the-corner for the next potential driver, which is likely the Federal Reserve’s stance on forward-looking interest rate policy and inflation expectations. A December hike is a fairly foregone conclusion at this point with near-100% odds on a 25 basis point move in December. More interesting, however, is what the Fed might be looking at for 2017 and thereafter. To read more, please check out our Market Talk article from this morning entitled, ‘The Fed’s Dot Plot Matrix is the Next Major Driver.’

- While markets are exuberantly pricing-in both stronger Dollars and stronger U.S. equities, the Federal Reserve’s stance for 2017 and 2018 will likely create further drive in one of these markets but not both. Should the Fed increase expectations for interest rates next year (similar to what happened in December of 2015), then we could see a continuation of USD-strength, and likely some element of weakness in stocks.

- Conversely, should the Fed merely hike rates in December without any increases for next year, this could bring on stronger stocks with some element of softness in the U.S. Dollar. This also carries the benefit for the Fed of not over-exposing the U.S. Dollar to extreme international capital flows. Chair Yellen had spoken about this in January, in which she alluded to the fact that with the Fed being one of the few Central Banks actually looking to hike rates, this could strengthen the Dollar to the degree that exporters begin to face pressure selling-abroad: And this carried with it the potential to derail any element of ‘recovery’ seen in the United States.

- After December, the picture is far from clear, but this is likely what will drive markets into year-end. Should the Fed take the hawkish route, long-USD setups are extremely attractive, particularly in areas with representative monetary divergence, such as USD/JPY and USD/CAD.

- If the Fed takes on a less-hawkish approach, we’re likely looking at some element of USD-range or weakness to go along with even higher-highs in equity and commodity markets. And for this approach, long Gold could become extremely attractive again.

--- Written by James Stanley, Analyst for DailyFX.com

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