The unexpected election of Donald Trump ignited major rallies in U.S. equities and the dollar. Yet in the two months since the inauguration more than half the gain for the dollar has vanished while equities have retained almost all of their improvement.
The different reaction is more striking since the Fed rate cycle which began in March would normally be supportive of the U.S. currency and a negative for the stock market.
From November 4th, the Friday before the election to January 3rd the Dollar Index (DXY) jumped 6.5 percent, from 96.894 to 103.210. It has since then fallen back to 99.739 (3/23/17, 3:45 pm), just 2.9 percent above the November low. Yesterday it touched the 61.8 percent Fibonacci level after having bounced from there at the end of January.
The euro lost 7.2 percent against the dollar in that same November to January period (1.1143-1.0339) and had regained 4.0 percent to 1.0783 by 4:00 pm on Thursday, just shy of the 61.8 percent Fibonacci line of the above loss.
Equities are a different story. From the November low to the January top the Dow rose 18.4 percent from 17,883.56 to 21,169.11. It has since dropped to 20,665.58, 15.6 percent above its November bottom. The S&P 500 executed a similar move, rising 15.3 percent to January 3rd and retaining 12.6 percent of that to the close on Thursday.
The Fed's 25 basis point hike at this month's FOMC meeting is assumed, by the Fed and the market, to be the first of three. This would place the Fed Funds rate at 1.5 percent at year end, the highest it has been in almost a decade.
The currency markets seem to be betting that the anemic U.S. economic growth, tracking at 0.9 percent in the first quarter according to the Atlanta Fed, will force the central bank to renege on its intentions, as it did in the past two years.
The equities however, are focused on Washington D.C. and the deregulatory and economic growth programs of the Trump administration and their potential for boosting U.S. GDP to 3 percent or higher.
Both views cannot be correct, but it might take until the third quarter for the answer.
Chief Market Strategist
WorldWideMarkets Online Trading