Our Technical View from 16.12.16:
The other major headline less talked about, comparing to the Dow 20,000 headlines, is the meaning of a world where the US Dollar is at parity with the Euro. The Euro yet again is under strong selling pressure which will soon place it in parity vs the mighty (or not) Euro.
The US Dollar Will Soon Be at Parity VS the Euro
The US Dollar has been trending higher for almost two years now and now a parity with the Euro seem inevitable. This new reality was crossing the mind of some of Wall Street more radical analysts during the past few years, but never reached the consensus of broader market as they believed that only a radical change in US Federal Reserve monetary policy can cause such a change.
Yesterday, the EUR/USD pair has traded to a low of 1.03665, a decline of 4% since the beginning of the year. The surprise rate of decline was mainly due to recent Fed's hawkish economic forecasts for the US, resulting in strong run for the US Dollar. The additional rate increase this month is a driver for continued Dollar strength as foreign investor shifting funds into the US, looking for higher rates of return on their investments.
Now, major investment firms are jumping on the parity trade has recent reports by Goldman Sachs, Deutsche Bank and Citigroup predicts a parity in the very near future and stronger dollar moving forward.
Going forward, traders are going to continue watch the following major catalysts impacting the Euro/USD trade:
Investors will watch weather the Fed continues to raise interest rates at the same pace, especially in relation to Europe; the higher the interest rate be at the US vs. Europe the higher the risk of potential sudden economic and political change in Europe. This occurrence described by economists as monetary policy divergence; when the Fed is moving in one direction and the ECB in the opposite direction, at the end something's got to give...
Political Crises and UncertaintyThe vote in the U.K. for leaving the European Union this year as well as the recent failure by the Italian government to pass constitutional reforms caused for growing fears over a rising popular trend of Euro union disbelievers. The upcoming election in Germany, France and Netherland will resurface those fears, causing unstable market environment and more instability in the Euro currency. In France the opposition leader, Le Pen, has already declared the intention of holding a referendum on future membership in the European Union.
US Politics and Donald TrumpSince the US election over, the dollar has rallied quickly. The US Dollar strength in this case is attributed to Donald Trump new policies on cutting corporate tax, investment in infrastructure and tough trade and border control. The future spending on infrastructure that Trump promised to do will boost the country growth prospects and in turn should also drive inflation higher; rising inflation might cause the Fed to raise rates at even a faster rate.
While all of the above are clear facts supported by simple economic principles, investor should remember that markets always move ahead of the economy and in this case investors should consider the possibility that much of the move is already priced in; and if the US economy will not grow as fast then a sharp reversal move might be in place.