Market views for 2017 - page 6

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Could Trump Talk Down The USD Successfully


President Donald Trump has broken with the usual practice of leaving comments on the valuation of the USD to the US Treasury by contradicting the current Treasury's strong-dollar policy.

Calling the USD "too strong" raises the question of what policy tools could be used to weaken the USD and, even more important, whether these tools could turn FX rates lastingly around. There have been occasions before when markets have speculated about the implementation of a 'USD weakening policy,’ where many concluded that a higher USD would be in the interest of a few but bear disadvantages for many. Just go back to February last year when there was talk the G20 had agreed to ‘currency coordination.

What could Trump do? The first policy option is to talk down the USD. Trump could simply continue to say that USD is too strong,as he did earlier this week. However, talk without action is unlikely to impact USD except in the very short term. Decreasing the demand for USD by keeping interest rates low is another option. Given Trump's comment this week, it is notunreasonable to imagine a scenario in which Trump tries to influence the Fed not to raise interest rates in the current environment as it would cause USD to rise too much. In fact, Trump made comments along these lines during the campaign in a CNBC interview saying,"I am a low interest rate person. If we raise interest rates and if the dollar starts getting too strong, we've going to have some very major problems."

Delaying hikes would cause steeper curve. With the Fed being politically independent, it does notneed to pay attention to such commentary. However,even if the Fed did back away from rate hikes, if Trump follows through on his fiscal policy plans, then any reduction on expectations of near-term hikes should just cause a steeper US curve,as markets would see the Fed as being behind the curve

Protectionist policies counterproductive. If Trump sought to gain competitiveness (quasi USD weakening policy) through import tariffs or border adjustability, we think this would be largely ineffective. Either of these policies would likely cause USD strength (possibly significant strength)even with retaliation from trading partners,given the US is a relatively closed economy. Similarly, labeling other countries currency manipulators may have a counter productive effect.

Bottom line: Weexplore his options and conclude that talking down the currency or putting pressure on theFed are unlikely to be successful. However, anyfailure to deliver on his promises on fiscal policy or tax reform would, in our view, bethe most likely route to a weaker USD.

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EUR/USD: Beware Of The Impact Of US Treasury Q1 Cash Deluge


The Treasury expects to draw down USD290bn from its deposits in Q1, which will add a corresponding amount of USD to the market. This amounts to a 9% increase in the monetary base.

If the US debt ceiling is not re-suspended or increased above the present debt level before 15 March, the cash buffer may be drawn down further to around USD23bn adding about USD80bn more to the market.

Since the US Treasury has committed to keeping a cash buffer of around USD500bn, a near-term fall in deposits would be rebuilt over the medium term.

The USD cash deluge is near-term negative for the USD, but not enough to offset support vis-à-vis EUR and Scandi currencies from relative rates and growth.

We forecast EUR/USD at 1.05 in 3M. Medium and long-term we are bearish USD and forecast EUR/USD at 1.12 in 12M.


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Goldman: "All Our Clients Are Confused And Unsettled"


Conversations we are having with clients: An investing strategy for a Trump Presidency

 

"I, Donald John Trump, do solemnly swear that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect, and defend the Constitution of the United States.” With those words, the New York businessman became at noon today President of the United States of America, completing one of the most improbable election campaigns in the country’s 240-year history. 

“Unsettled” is our best description of fund managers’ mindset as the new administration takes office. During an extensive series of client meetings in the US, Europe and Asia, it became apparent that investors are confused about how to best position portfolios under a Trump presidency. 

Optimism is reflected in the strong performance of markets during the 73-day transition period between the election and inauguration. Investors have embraced the prospect of faster GDP growth and higher inflation as a result of reduced corporate taxes, a looser fiscal policy, and less regulation. Surveys such as NFIB small business confidence and consumer confidence both soared to their highest levels in 12 and 15 years. 

S&P 500 index has climbed by 6% since November 8 led by Cyclicals broadly and Financials in particular. Europe, Japan and MSCI Asia stocks have returned 8%, 12% and 1%, respectively. Implied inflation during the next decade equals 2.0% and the 10-year Treasury now yields 2.47%.

 

Policy uncertainty was a topic of concern raised in every client meeting. While we expect corporate tax reform legislation will be enacted in 2017, the magnitude of cuts and offsetting revenue proposals are unknown. Many tax reform ideas have been discussed in general terms but the administration has not yet endorsed any specific proposals. Investor confusion increases when a topic that appears to be gaining political momentum – such as border-adjusted tax reform – is suddenly discredited when the President dismisses the idea saying it is “too complicated.”

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Bundesbank: German inflation could rise to 2% in January


Latest Buba monthly report

  • ECB QE pushed down the euro by 6.5% largely before it even started
  • The German economy gained pace in Q4
They're mainly agreeing with the ECB that energy prices are the main driver behind the pick up in inflation.     
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Trump’s Border Tax And The USD


The Trump rally is disappearing. Since the beginning of the year, the U.S. dollar index is down close to 3% and while the S&P 500 is still up for the year, the Dow is turning negative. Additionally, ten-year Treasury yields have fallen sharply, dropping as much as 8bp at the start of Donald Trump’s first week in office. It is clear that Trump’s policies are making investors nervous, but protectionism can be good for the dollar. On Monday morning, President Trump reiterated his plans to “cut taxes massively” and bring manufacturing jobs back to America. These comments initially helped the greenback recover overnight losses but the gains were given up quickly as market participants chose to focus on his plan to “impose a very major border tax.” While Trump is following through with his promise for tax cuts, spending and jobs, it is becoming clear that it will be at the expense of international trade. We shouldn’t be surprised as this is consistent with his assaults on China and Mexico for their role in weakening U.S. trade and his criticism of a strong dollar. Protectionism was also a big theme of his campaign and now it is clear that he will be pressing forward and not retreating from these promises. He made 3 official announcements Monday: #1 Withdraw from TPP, #2 Freeze federal hiring except military and #3 Reinstate Mexico City rule banning US funds supporting overseas abortion. According to Press Secretary Spicer, there may be more executive orders on trade this week that will undoubtedly trigger more volatility in currencies.

In order to pay for corporate and individual tax cuts, Trump needs a border tax, which on a fundamental basis is negative for U.S. stocks and positive for the dollar. More than 40% of the sales of companies in the S&P 500 is out of the U.S. and an even greater number produce parts of their product abroad. While goal is to increase the tax revenue, inflation would rise, imports would fall and exports would increase. The U.S. dollar should benefit from a border tax even though it is now falling on risk aversion and uncertainty. All signs are pointing to a global trade war. The Mexican government said Monday that it is “obliged to take steps to defend their interests given the new vision in the U.S.” Investors are worried that other countries will retaliate and any headlines related to that would be USD negative. In other words, before the dust settles, the dollar could and should continue to weaken against many major currencies before a border tax finally lifts it again. It is estimated that a 20% border tax would boost the dollar by 15% over a 3-year period because it effectively devalues the dollar by making imports more expensive and exports cheaper. Of course, how much the tax affects the dollar ultimately depends on how many industries and countries are subjected to the tax. With no major U.S. economic reports scheduled for release before Friday when Q4 GDP numbers are due, Trump headlines will continue to drive greenback flows. As for USD/JPY, if it remains below 113, there’s a good chance we’ll see 112 tested.

Next to the Japanese yen, Monday's best-performing currency was the British pound, which broke 1.25 versus the U.S. dollar. Sterling is a big focus this week with the U.K. Supreme Court’s ruling on Article 50 due on Tuesday. The British pound performed extremely well Monday as it is almost certain the Court will vote in favor of Parliament’s approval in triggering article 50, which would spark another near-term spike in GBP. However if we are wrong and they say no approval is needed, sterling could slip quickly. Aside from the U.K. Court’s decision, we are also watching for any interesting headlines from Prime Minister May’s trip to Washington. If the U.S. throws its support behind a strong bilateral trade deal with the U.K. (and we think it will), sterling will trade sharply higher on the hope that other nations will follow. Before her trip, however, we have Q4 GDP numbers and a speech from Governor Carney on the calendar.


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UBS Wealth Management strategist says USD will weaken as Trump boosts debt


Wayne Gordon, investment strategist at UBS Wealth Management, with comments reported via Bloomberg:

  • Expects the US dollar to weaken as new president Trump boost US debt
  • Says the USD has peaked
  • Its set to 'roll over'
  • Industrial pick up will benefit the price of metals, steel
via Bloomberg
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Trump EU ambassador candidate says he'd short the euro


BBC with this gem

Professor Ted Malloch says the euro could collapse in the next 18 months.

  • Would short the euro himself
  • Britain could agree a mutually beneficial free trade agreement with the US in as little as 90 (I like the cut of his jib)
  • Would be best for the US if Britain executed a clean break
  • Any attempt by the EU to block UK beginning negotiations with the US would be absurd "and like a husband trying to stop his wife having an affair"
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EUR/USD: To Rally Towards 1.10 Short-Term; Sell Into This Rally Long-Term


EURO NOT READY FOR A SUSTAINABLE RALLY. The outlook for the euro remains negative, consensus projects EUR/USD to trade lower near parity during H1 2017. We agree but the market is also clearly positioned for a weak euro -> we expect EUR/USD to rally short-term up towards 1.10 as USDpositioning looks stretched. EUR/USD remains a sell on rallies.

SHORT-TERM: Economic growth is recovering and the euro area is expanding just above trend. Unemployment is falling and inflation is slowly rising. We think it likely ECB will continue its QE-program throughout 2017 but that Mr Draghi may well taper current pace of purchases further (currently EUR 60bn/month from April). The policy divergence vs a hiking Federal Reserve remains a relevant (negative) driver for the euro in the coming year. QE policy has likely contributed to make global reserve managers cut the fixed income holding of the euro-zone (large net bond outflows 2015/16), in-turn boosting already large imbalances in the Target 2 system. Furthermore, the current account development (increasing surpluses) is driven almost exclusively by German exports (hence not that strong a supportive euro factor). These factors show that large internal euro-zone imbalances and problems still exist. Political elections in 2017 risks boosting already elevated risk premia in the euro-zone furthermore.

LONG-TERM: The institutional crisis and imbalances that the euro-zone finds itself in, motivates a weak euro for long. Appetite on European assets will be low and foreign capital likely to seek to hedge their euro exposures. We expect the euro trade-weighted currency to be a funding currency of choice in 2017.


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