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PIG TODAY-USD: What To Expect In Trump's First 100 Days - Credit Agricole

The USD bulls have had a dismal start to 2017 but are hoping that President Trump’s first 100 days in office can revive the dollar rally.

‘Trumponomics’ is based on three pillars: fiscal stimulus, deregulation and protectionism....We expect President Trump to hit the ground running next week, with early executive-order activism likely in the area of energy deregulation and trade. The most USD-positive aspects of his agenda (corporate and personal income tax reform, infrastructure spending) need to be legislated in Congress and could be significantly delayed.

Markets have been predominantly top-down in their approach to the USD. However, leaving aside the uncertainties of Trump’s policies, the underlying momentum in the US economy is still consistent with further Fed hikes and a stronger USD. Rising consumer confidence and business ‘animal spirits’ support that view as well.

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From an FX perspective, the likely policy path of the new administration contains an inherent contradiction. While expansionary fiscal policy in the context of a US economy at full employment is clearly positive for the USD, a strong currency does not bode well for a protectionist approach to trade policy. Indeed, incoming Treasury Secretary Steven Mnuchin has avoided specifying whether he favours a ‘strong dollar’ approach, which has more or less been a consistent stance from the Treasury since Robert Rubin in the mid-1990s.

Strategically, in our 2017 outlook and FX forecasts we have argued for a measured appreciation of the USD. We still believe that relative rates and Fed policy will be the key driver of the USD. We are thus wary of turning excessively ‘top-down’ in our approach to G10 FX and continue to focus on the incoming data rather than the conflicting signals from the new administration. Recent evidence of rising price pressures in the US economy suggests the Fed will proceed with its tightening cycle, widening the USD’s yield advantage. Following the recent correction, market rates are once again lagging the Fed dots, by around 32bp by the end of 2017 and 70bp by the end of 2018. This suggests there is plenty of scope for rates and the USD to rise, even if the new administration does not deliver much on the fiscal front.

From a tactical perspective, we also believe the USD rally has entered a more mature stage. We see investors turning increasingly discriminate with respect to positioning, with the understanding that the risk backdrop is turning more uncertain.

This suggests that over the coming three months the USD may rebound more against the G10 commodity currencies, which could be hurt by US protectionism and rising global trade tensions.

Source: efxnews.com

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