The Greenback Remains Resilient

The US dollar remains bid. It is at its year high against the euro and five-month highs against the Japanese yen. Sterling, which has performed better recently, remains in the trough around 30-year lows.  

It surge since the election reflects three considerations. The first is December Fed hike. Prior to the election, the market was assessing around a two-thirds chance.Now both the CME and Bloomberg’s WIRP estimate the odds above 90%.Investors have also increased the anticipated path of Fed next year as well.  

Second, and partly related, the new US Administration has promised significant fiscal support on par with the Feb 2009 package delivered near the low point of a deep downturn. Of course, there is more unknown than known at this juncture. However, it does seem that some measure of fiscal stimulus will be forthcoming. Both candidates had promised it, and Trump’s proposal was larger. The Democrats may support the spending increases and the Republicans the tax cuts. More broadly, a pattern may be emerging where fiscal policy is no longer taboo, though the EC apparently has not gotten the memo.  

Third, another pattern that is influencing investment is the rise of the populist right. Europe is particularly vulnerable. The calendar is not particularly kind, with the Italian referendum and Austrian Presidential election (do-over) in early December.The Dutch go the polls in early spring.These events are like a dress rehearsal for the French presidential election.Le Pen is running strong and, given the disrepair of the Socialist Party, is expected to make it to the run-off to face the Republican candidate (first round of the first primary is this coming weekend).  

The combination of these considerations and market positioning helps explains the persistence of some of the moves in the capital markets, including the strength of the dollar.  Another persistent move is the adjustment of long-term interest rates. Yesterday’s pullback in yields was corrective in nature and not the start of a serious correction.Japan’s 10-year bond yield is above zero today (one basis point), the highest since March and the fifth consecutive increase.