The vast majority of market participants are showing a surprising lack of flexibility and adaptability when it comes to the Trumpflation trade. As Bloomberg's Mark Cudmore warns, they may regret it.
The dollar can still correct a chunk more without 2017 being a write off. The rush to rapidly buy the smallest dip, without proper consideration for the risks, is fraught with danger.
In the last 24 hours, I’ve been overwhelmed by the number of analyst notes recommending that the correction in the Trump victory-related themes – stronger dollar and higher yields as the most prominent ones — has already gone too far and provides a great “opportunity” to add to positions.
They may be correct, but the incredible conviction and seeming inability to add some nuance to the view is worrying. It’s verging on religious fervor, and shows a level of defensiveness that normally only comes from someone on the back-foot.
The Bloomberg Dollar Spot Index remains more than 5% above where it closed on election day. It can still fall another 2%, and remain comfortably in a medium-term uptrend.
Similarly, U.S. 10-year Treasury yields remain more than 50 basis points higher and can drop another 20 basis points without destroying a 2017 theme of rising rates.
The point is that there is room for a larger correction now without derailing full-year Trumpflation trades. But it seems the market doesn’t want to countenance such a concept.
This single-mindedness is surprising given that there’s been little this week to boost the fundamental argument for a stronger dollar accompanied by higher rates. Trump’s press conference didn’t outline an expedited stimulus plan. In fact it’s arguable that it implied a massive fiscal jolt may be less probable.
The closes this week will be important technically. It’ll be an easier 2017 for traders if the consensus is correct in January. But to me, a simple risk-reward analysis suggests that the rest of this month should be spent more focused on the downside risks.
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