All Hail America – Going Into The US Primaries

President Obama said in his final State of the Union address last week that the U.S. has the strongest economy and they are by far the strongest nation on the planet, adding that “there’s no reason why we shouldn’t own the 21st century.”

If you do not believe that America is the greatest nation on Earth then do let the markets show it to you with the US dollar continuing on its indefatigable run without slowing down into 2016 for its longest period of prolonged strength in the past 10 years that should come as no surprise to those who believe that the US is still the world’s mightiest economy relative to the flaws and imperfections in the rest of the world that is starting to crack under the spotlight.

The DXY USD index has never been stronger since 2003 since it started to pick up steam in mid 2014.

All Hail America The Mighty USD ?

And there is absolutely no question on the domination of the USD which has become a crowded trade that has paid off in the past 18 months as longs continue to hold way above its 10 year average.

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CFTC DXY Net Positions

 

Obama is about to leave office as the US heads into its most exciting election year in a long time as Citibank sees a “significant worsening of the global political climate” into 2016, complete with our current financial market turmoil as central banks break ranks in their policy outlook and crashing oil prices takes a bite out of economic confidence along with China troubles.

With 7 FOMC meetings between now and the US Elections, we can imagine a lot of room for surprises but if we rationalise the entire situation as the markets have, the Fed is only expected to hike another 50 bp from now till year end which is a sensible rationale given that US primaries start on 1 Feb into Super Tuesday on 1 Mar and by June, we should know who the presidential candidates are which also means the Fed could have a new boss by year end.

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Elections are renewal time and statistically significant with empirical evidence that the Dow Jones has not ever suffered a loss in a pre-election year since 1939 which is agitating as a fact given that 2016 is not the pre-election year anymore.

“stocks tend to perform better in periods of legislative gridlock, when presidential power is offset by the opposition party controlling Congress. ………..the S&P 500 posted its weakest returns in the first year of the four-year election cycle. Since 1900, stocks have gained just 3.4% on average in the post-election year, compared with gains of 4.0% in the midterm year, 11.3% in the pre-election year and 9.5% in an election year.”

The USD has had a positive correlation with the S&P 500 for the past 2 years and it would not be a surprise at all if the USD comes off its high horse after 18 months of rally as we head  into the change of US leadership with some developments a cause for concern as Donald Trump leads in the GOP polls.

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