The Trump win is playing out as a major boost to USD and, to a lesser degree, risk sentiment for a couple of reasons.Investors seem to be focusing on the positives associated with Trump’s plans for fiscal stimulus, comprehensive tax reform and improved governance in the US while downplaying the negatives from growing protectionism. In addition, US political risks are not expected to resurface before yearend, allowing investors to focus on still fairly resilient US and global economic data, as well as the December Fed meeting.
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The USD should remain the main beneficiary in this brave new world of ‘government funded’ economic optimism, rising inflation expectations and abating political risks. Indeed, markets are starting to perceive the Trump win as re-invigorating the USD-divergence trade. Trump’s policies could support US growth but penalise America’s main trading partners. Over time, this should trigger more inflows into USD. Next week’s US CPI and retail sales data as well as Yellen’s testimony could trigger further steepening of the UST curve ahead of the December FOMC meeting. We stick to our long USD/JPY position in our portfolio.*
Some cracks are starting to appear in the Trump-induced risk rally as the tightening in the global financial conditions has intensified of late. We further note that a stronger US recovery from here may not be the locomotive of global recovery that it once was, especially given the risk of rampant protectionism. We advise caution on AUD and NZD ahead of the Australian employment and the New Zealand retail sales data next week. CAD is the G10 commodity currency likely to be the hardest hit from any US protectionism. Its relative underperformance could continue ahead of the Canadian CPI data next week.
The Trump victory has sent both JPY and EUR lower as risk sentiment improved. In the case of EUR, we suspect that fears about the negative impact of global protectionism on the small open economies in the Eurozone could remain a drag.
GBP was the only G10 currency able to keep up with the resurgent USD. Market positioning and the belief that the Trump win may boost the UK’s bargaining position ahead of Brexit likely played a role. Next week’s labour market data could help GBP consolidate some more.