Dollar technicals are stretched, but fundamental shift underway - BBH

Research Team at BBH, suggests that at the very least, the promise of fiscal stimulus for a U.S. economy that is already growing near-trend, while core PCE deflator and wage growth gradually increasing, may be confirming the biggest change in the investment climate since the financial crisis. 

Key Quotes

“The dramatic adjustment seen in interest rate markets and the dollar reflects the repricing of assets under a new paradigm.  Of course, two weeks after the election, details do not exist yet, and the Republican President-elect has bolder ideas that part of the Republican Party that may lead the legislative branch.  However, the direction is clear.”  

“The US Dollar Index has risen for ten consecutive sessions.  In this two-week period, it has gained about 4.25% to reach its best level since 2003.  It has only fallen in two of the first seven weeks here in Q4.  On October 20, when the 50-day moving average moved above the 200-day moving average (Golden Cross), Dollar Index closed near 98.30.  It pushed a little past 101.30 last week. The technicals are stretched.  The RSI is at its highest in more than 18 months, but there no bearish divergences.”

“The price action gives no reason to think that this surge in dollar demand has been satiated.   In the last seven sessions, the Dollar Index recorded higher highs and higher lows.  The next important chart point is seen near 101.80.  That is the 61.8% retracement of the Dollar Index's decline from what I have dubbed the Clinton Dollar Rally of the second half of the 1990s, ending with G7 intervention to arrest the euro's slide.   A convincing break of that area will make my longer-term call of a move to that Clinton Dollar Rally high (~121) look less extreme.”