The US Dollar surged to a fresh 14 year high yesterday. Overnight the rally continued as the US Dollar Index broke out of a multi-year bull flag.
The odds favor a continuation of this move with the US Dollar moving sharply higher versus its Euro, Canadian, Japanese, British, and Australian partners in the months ahead.
The Euro is quietly nearing that much hyped parity level of $1.00.
The EUR/USD has yet to breach the bear flag, but it is only a matter of time.
What does this mean for the stock market and commodities?
For one gold and precious metals have a lot further to fall. All those Gold bugs who have been calling for Gold to hit $5,000 every year since 2008?? They will be making those same failed calls from even lower prices in the months ahead.
How about the bond market? We are seeing it already. Bonds are selling off. This sell-off could be just the beginning as investors rush out of a Central Bank manipulated bond market and into higher yielding assets. Also fresh fiscal policy under a new regime could trigger the long awaited inflation that the Central Banks have been begging for.... yet curiously enough have become afraid of....hmmmm....
How about the stock market?
A weaker dollar was great for the stock market after the financial crisis in 2009 and over the last few years a stronger US Dollar has done little to derail the stock market in the United States. This could remain the case into 2017 as money flows out of the Centrally Bank planned bond bubble and into the stock market in the United States.... However a stronger US Dollar is not bullish for emerging markets.
$EEM - the emerging markets ETF tracks the performance in these countries:
A stronger US Dollar also makes dollar denominated debt more expensive. A day of reckoning could be coming in 2017 for corporations who have utilized artificially low interest rates to take on way more debt than they could possibly afford to service under normal market conditions. Higher cost of capital, or the unavailability of capital could create a funding crisis in Emerging markets amid a US Dollar rally. All it will take is one Domino to fall.
Which brings us to the United States. Those corporations who have used the 7+ years after the Financial crisis to RE-LEVERAGE their balance sheet, will be at risk in the months ahead as interest rates rise. Low interest rates were meant to stoke growth, but alas the Greed that fuels the market usually wins out. And the same corporations who were on the brink of collapse in 2008/2009 have re-leveraged their companies and are back to using them as their own personal piggy banks.
In 2009. 2010, 2011 market pundits, including myself, were scared stiff about the value of the US dollar. The FED seemed hell bent on turning the US dollar into toilet paper. Helicopter Ben was going to ruin the reserve status of our currency. He was dropping barrels of Dollars from his helicopter in hopes of stoking growth. Helicopter Ben's actions seem to have helped our economy come out of the worst recession since the Great Depression. However the US Dollar did not fall as far as everyone thought. It did not lose its reserve status. Instead every other Central Bank in the world has taken the baton from the FED and run with it. Ben's Helicopter is now flown by every Central Bank head in the World.
Those scared of a weak US dollar a few years ago are now wondering just how high the dollar will go. How strong will it get. And even more importantly what will happen if the FED continues to raise rates. Let's take it even one step further. What if Trump brings inflation back into the Untied States?
Interest rate policy was easy to make when inflation was low, or with deflationary pressures. What if inflation starts to take off? What if prices are on the cusp of a parabolic rise. What if the FED was too late taking the training wheels off the financial markets? We could see a 'Runaway" US Dollar... which ultimately will be bad for all markets.
Tough decisions lie ahead. But one thing I think is certain. The US Dollar is back. It's the cleanest turd in the litter box.