If we could only look at one chart it would have to be the following one:
US Dollar Index (Weekly)
After peaking in March the US Dollar Index has spent the last 6 months consolidating between roughly 93 on the downside and 98 on the upside. A decisive resolution of this range will have vast implications across asset classes.
Hedge fund titan Jeff Gundlach summed it up well in a recent interview:
“But we’re in a funny kind of circular logic world, where, since the Fed acknowledged a strong dollar could become a variable, that meant the odds of the Fed increasing interest rates declined. One of the reasons the dollar stopped strengthening is the consequence of the Fed mentioning its strength has been problematic, meaning there’s less likelihood of them tightening. But the reason the dollar was getting so strong was that the Fed was talking about tightening.
You see the circular logic: The dollar is strong, so they can’t tighten. So the dollar weakens, so they can’t tighten. So the dollar strengthens, so they can’t tighten, so the dollar weakens, so they can’t tighten. And around we go. That’s where we are right now.”
With the Fed announcement coming Thursday afternoon most investors are looking for a rate hike or at least strong indication that a rate hike is coming in December. What if the Fed were to simply stand pat and the US dollar were to continue its rangebound oscillation into 2016? That’s where my money is. A premature rate-hike could be quite damaging and not worth the risk, whereas, waiting another few months in order to have more confidence regarding some of the current macro concerns (China, emerging markets, etc.) definitely seems to be the prudent course of action.