The US Dollar and the US equities are still on fire, adding more gains by the days and such moves seem to continue for an extended period of time.
Trump has already noted many times that the US Dollar is significantly higher, he also said: “It’s killing us.” Despite that, the US Dollar is still rising.
One of the reasons of the USD strength is the market estimates for a possible rate hike by the Federal Reserve in March.
Fed Fund Futures
In the meantime, the Fed Fund Futures are pricing in 70% chance for a rate hike in March meeting. Despite that, the US equities are still rising, supported by his reassurance to spend 1 trillion USD on infrastructure.
Yet, nothing happened yet, this is only a plan, and the implementation is what matters to the market. Moreover, we don’t know yet, where and how Trump will secure the funding for such plan, especially that the Debt Ceiling deadline is around the corner.
US Dollar Index chart
Looking at the US Dollar Index chart, we noted before that the index is in the process of building a head and shoulder pattern (bearish) as long as the index continues to trade below 101.70.
Yesterday, the index managed to close well above that resistance, which eases the chances for this pattern to continue. However, I would stand aside and watch the weekly close before deciding on such pattern.
US Data – Mixed signs
The fundamentals are also mixed, a few days ago the Manufacturing PMI came in much better than expected, which reflects the Manufacturing sector optimism toward Trump’s plan.
Yet, the Construction Spending posted the biggest monthly decline since almost a year, leading Atlanta Fed to downgrade the GDP for the first quarter of this year to below 2%.
Traders need to keep an eye on Janet Yellen’s remarks next week, as she is likely to be dovish as a significant rise in USD is not desired at this moment. Therefore, a dovish hike is more likely.
Moreover, the rate hike is probably priced in, therefore, the current rally in the US Dollar might not continue for a long time. This is why I would stand aside and wait for the pattern to develop before jumping into the market again.
US Equities – Alarming Signs?
As for the US equities and as we noted before, I am not touching such soaring market. Valuations have reached significant levels, which is alarming. But I would still prefer the European equities, which I believe that it’s healthy and not overvalued.
The NYSE Margin Debt is also alarming as its reaching record highs. In the past decades, every time the NYSE Margin Debt reached a record, a significant correction occurred.
The question remains here is when and why the correction might occur? In short, no one knows. It needs a significant catalyst to change the market consensus.
In Europe, despite the fact that the ECB promised the markets to start tapering in April, equities corrected for a short period of time before it continued its long term uptrend. This is the difference between the US and Europe.
Equities are healthier than in the US. Therefore, I would still prefer Europe over the US, despite the uncertainties toward Brexit and the French elections ahead.
On a final note, the current move in the US reminds me of what happened prior to the financial crises, very high valuations, significant earnings, but the difference here is that growth figures are fragile, while inflation is showing signs of a notable rise ahead.
The question here is what the Fed would do if inflation kept on rising while growth remained the same if not lower? That would be another dilemma for the world not only for the US.