Rogue One

09 Jan 2017

Key takeaways

  • The Federal Reserve is now expected to hike three times this year
  • We believe monetary and fiscal policy divergence should benefit the US dollar in 2017
  • Donald Trump’s election is likely to boost real growth to a range of about 2.5% in the medium term

Full commentary

Currency traders enjoyed the last two months of the year. The long US dollar (USD) trade was a consensus trade at the beginning of 2016 as the Federal Reserve (Fed) was expected to hike
four times in 2016. This proved especially painful in the first ten months of the year as USD/JPY declined 20%, from 120 to 100, EUR/USD stayed in a tight range and the Fed hiked only one time, on December 14.

The US elections broke the USD/JPY spell with US yields moving higher and USD/JPY surging 17% within two weeks after the election results, posing the largest monthly surge since August 1995!

The first week of 2017 resembles to some extend the first week of 2016. The Fed is now expected to hike three times this year and the long USD trade is again consensus. An article in the NYT over the weekend, suggested that the USD could surge 20% to 25% on a potential corporate tax cut.

For us, monetary and fiscal policy divergence should benefit the USD in 2017. US real growth has averaged about 2% per annum since the post-Lehman recovery started in 2009. Donald Trump’s recent election is likely to boost real growth to a range of about 2.5% in the medium term through a significant fiscal stimulus (largely unfunded personal and corporate tax cuts, and a large infrastructure spending program). In the meantime, other major economies are likely to remain mired in a lowgrowth/ low inflation mode beset by political issues and elections in Europe (Brexit, migration, and elections in Italy, France and Germany), continued struggles with the politics of Abenomics and disinflation in Japan, and subdued growth in China and emerging markets generally, though global growth is picking up from levels in most regions. However, after the rapid moves over the last few weeks, we are cautious to continue to extrapolate further gains without any significant pullback. As the small crew in Rogue One managed to upset the plans of the Empire, so can some currencies stage a pull back against the USD – we will not be surprised if the EUR and the JPY appreciate about 2-3% into the Inauguration Day.

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