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Republicans’ sweep of Congress recalls 1995 dollar secular bull

by Ashraf Laidi

Less than 24 hours after we noted that Friday’s US jobs report may not matter for the US dollar, the USD index broke out to fresh four-year highs, with another perfect-storm of a day, with positive data in the US and further downside surprise figures from the Eurozone, UK and Japan, as well as a historic Republican sweep of US Congress.

The contrasting data showing came in the form of disappointing UK and Eurozone PMI series (17-month lows in UK services PMI and nine-month lows in German services PMI), while Oct ADP rose to 229k—the seventh straight figure above 200k, and the November services ISM employment sub-index hit a fresh nine-year high at 59.6).

The US Republican party’s sweeping victory in both the Senate and House of Representatives in the mid-term elections also helped power up the US currency, as the market-friendly party retains control of both chambers for the first time since 2007.

Seven-year dollar rally began in 1995 when Republican swept Congress during Democrat president

There is no definite relationship between the performance of the US dollar and the division of partisan power in Congress, but it is worth mentioning that the last major secular rally in the US currency kicked off after the 1995 midterm elections, when Republicans took control of both chambers (led by Gingrich) in a Democrat-led White House (Clinton). The Republican-dominated Congress forced Clinton to adopt more market-friendly policies, helped by an emerging budget surplus, accelerating global flows into US equity and capital markets. This was followed by the “strong dollar” policy adopted by Secretaries Rubin, Summers and O’Neil, which extended the bull market from 1996 to 2002.

Today, the economic environment is glaringly different from the mid- 1990′s, but this does not overlook the similarity of the contrast between the then prevailing relative growth rates between the US and rest of the world (Germany’s post-unification struggle and Japan’s zero-bound policy). More importantly, the Federal Reserve is the only major central bank to have taken concrete (and preliminary) steps in ending a period of multi-year policy easing. This should re-affirm the trend cyclicality of the USD Index, highlighted by an average duration of nine-years for downcycles and upcycles lasting six years. USDJPY-SPX-Oct-31

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