Revaluation Of The Dollar Continues

Since the US election, the dollar has been on a tear.  Pullbacks have been brief and shallow.  There are powerful trends in place.  The euro has fallen nearly five percent over the past ten sessions, during which it is not closed higher once.  The dollar rose four days this week against the yen and four days last week.  The dollar has risen a little more than 7% against the yen during this run to reach five-month highs by approaching JPY111 today.  

US 10-year yields have fallen once in the past two weeks.  Above 2.30%, the yield is at its highest in nearly a year.  The S&P 500 is within 0.3% of its record high set in mid-August.  The yield on the 10-year German bund has doubled to 30 bp over the past two weeks. The 10-year JGB yield finished at two basis points, which is the highest on a weekly close in nine months. 

Many market observers are cautioning that investors are getting ahead of themselves.  That a Fed rate hike next month has already been discounted.  Like all politicians, and perhaps even more so given his irreverent campaign, the extent to which Trump fulfill his campaign promise, is unclear. Moreover, Trump often was seen campaigning against Republican’s in Congress, many of whom do not share his commitment to fiscal stimulus.  

These concerns fail to appreciate the watershed that is taking place.  It appears that the three-decade secular decline in bond yields may be over.  This is important and has far-reaching implications.  At the very least, we are experiencing the biggest change in the investment climate since the Great Financial Crisis. 

On top of this, being bitten by the same dog twice, surprising by the extent of the seeming nationalist/populist shift;first in the UK and then in the US,  investors have turned a jaundiced eye toward Europe  While the nationalism/populism has altered the course of these two countries, it may be an acid the dissolves the glue that binds Europe together.  Italy’s constitutional referendum and the Austrian presidential election in early December seem to be appetizers for the main course, the French presidential election in the Spring, in which the odds of the National Front winning seem to be rising.