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Further USD Strength Could Continue to Support Equities

  • The strong beat in retail sales earlier has been supporting the US Dollar, which keeps reaching new highs against major crosses.
  • We previously saw that preference for the USD could continue in the near to medium as the Fed taper nears; US policymakers are expected to announce the beginning of the tapering in November for a December start (consensus views 15USD reduction in asset purchases every month).
  • Hence, the 'contraction of liquidity' could lead to further appreciation in the USD, which would continue to support US equities relative to other (DM/EM) equity markets.
  • The chart below shows that US stocks (SPY) generally outperform the rest of the world equities (VEU) when USD rises broadly.

Source: Bloomberg/MNI

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