Two Worlds Aligned

FASCINATING - The market is taking it's time digesting the latest Fed decision, but will also now look for added insight into Fed policy by way of tomorrow's US jobs report. In the interim, I'd like to touch on a point that I think is quite fascinating. When we look at monetary policy over the past several years, it has been an excessively accommodative in response to the financial markets crisis of 2008. And now, we have reached the end of that rope and have begun to transition into a more normalized policy ultimately leading to a tightening of policy as rates start to ramp up over the coming years. The fascinating part about all of this is that the US government's political approach has been very much consistent with Fed policy over this time period, and as we've reached the end of monetary policy accommodation, so too have we reached the end of what I would call political accommodation. 

POLITICAL TIGHTENING - So what do I mean by this? Well, if we think about the previous US administration's approach to governance, it was an approach where the administration did what it could do always err on the diplomatic side, preferring to not rock the boat. Any time there was any escalation of any kind, the government employed its strategy of political accommodation to keep things calm, moving ahead without any allowance for a real escalation of any crisis. But now, at the same time as we reach the end of monetary policy accommodation, we have also reached the end of this political accommodation, with the new US administration coming at things with a much different approach. The new US administration isn't as relaxed about policy and is looking to tighten things up. So if you will, we are seeing a form of political tightening. And so yes, I think it's fascinating when you think about it like this. That we have come out of a period of monetary policy accommodation and political accommodation, to now enter a phase of monetary policy tightening and political tightening. 

 BUT WHAT ABOUT THE BUCK? - The above is not meant to be political in any way and is more of an observation about the current state of things and how everything seems to be aligned, more so than we may even realize. The big question I have right now as far as the currency market goes is what all of this will mean for the US Dollar? There was a time I believed the normalization of Fed policy would be a tremendous added boost for the US Dollar. But now, I'm not as confident.  When you consider the painfully slow pace at which this Fed policy normalization is happening and a US administration that is believed to be promoting a soft US Dollar given its protectionist agenda, we may not see the Buck put in any major rallies from here and perhaps the market has already priced in all of the meaningful US Dollar upside in recent years in anticipation of the policy shift. At the same time, I still believe we will see the Buck try and make another decent run over the shorter term. 

The Fed's move to monetary policy normalization coincides with the transition on the political front. Via @joelkruger

STRATEGY - Strategically, given the developments on the technical front, my view has shifted to being more US Dollar bearish than bullish. But when I say this, I say this with respect to the Euro and Pound. And yet, when you look at both of these currencies, there is a feeling that at least over the short term, there is room for some corrective weakness. With the Euro, I keep thinking about last Monday's 200 point gap open and the fact that there is still a chunk of that gap that needs to be filled down to 1.0730 before the market can really start thinking about that next big move. With the Pound, I believe the hard talk between EU officials and PM May will start to weigh some more on this latest recovery, and I also think the market should be careful jumping to any firm conclusions about the UK election until it's out of the way in June. So as I've already highlighted, I like the idea of waiting a bit to see if we get a shot at buying buying EURUSD down towards 1.0730 and buying GBPUSD into the 1.2500 area. 

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