- Expert Views
Natixis: US dollar surges following the Trump bounce
16 November 2016 • Source: Nordine Naam, Senior Forex Analyst, Natixis
Last week, Donald Trump defied the pollsters to win the US presidential election, while the Republican Party retained control of Congress. Although the shock result prompted a negative knee-jerk reaction by the markets, the president-elect’s conciliatory address to the nation helped both riskier assets and USD to rebound – at the bond markets’ expense.
During his opening address, Trump’s $500bn-$1 trillion pledge to finance infrastructure projects was welcomed by the markets – given its view that increased spending signals both stronger economic growth and higher inflation are on the horizon. In this respect, the market has momentarily ignored the president-elect’s protectionist policies that were endorsed during the presidential campaign – policies that will, in turn, dampen the US dollar – and has instead been absorbed by the silver lining measures that will boost the economy.
Of course, foreign relations, particularly with China and Mexico, will be of paramount importance. At present, Trump’s advisors seem intent on soothing concerns regarding an eventual trade with China, but policies regarding the mass deportation of criminals and building a structure along the southern border are less pleasing to the markets.
With this in mind, before Trump is sworn into office on 20th January, the market will be wary of any prospective protectionist measures. However, if none are announced, we can expect the US dollar to continue its rally – spurred by the prospect of both stronger economic growth and the Federal Reserve (the Fed) opting to continue its course of monetary policy normalisation. Also contributing to the US dollar’s surge is the president-elect’s less critical approach to the Fed’s chair, Janet Yellen. Trump’s new tact has, in turn, allowed both the US dollar and risky assets to surge in a similar way to the UK’s equity markets following the Brexit referendum.
In the absence of news, the market is likely to focus on the economy’s short-term outlook until more light is shed on Trump’s economic programme, which will likely come in January 2017. Therefore, in the short-term, both the Federal Open Market Committee’s (FOMC) next meeting on 14th December and the next administration’s composition will influence the market’s movements.
All things considered, we expect the greenback to continue its appreciation, with the DXY dollar index set to test 100 in the short-term and towards 102 during 2017. The US dollar could rise even higher if economic growth is stimulated by higher short-term interest rates, which could result from an inflation upturn.
EUR: EUR/USD heading lower towards 1.05
Following the presidential election’s conclusion, the EUR/USD resumed its descent in the face of an invigorated US dollar. Indeed, the euro is under the cosh from several internal risks, including Italy’s constitutional referendum on 4th December, as well as the prospect of the European Central Bank (ECB) extending its quantitative easing (QE) programme for a further six months until September 2017. What’s more, the discrepancy between the ECB and the Fed’s respective monetary policies may cause the EUR/USD to correct towards 1.07 in December.
The EUR/USD is declining more rapidly than expected towards our 2017 target of 1.05, which may, in fact, be reached this year. This will largely depend on both the Fed’s tone during its December meeting and December’s US employment data – notably the hourly earnings figures, given the 2.8% month-on-month (MoM) surge in October.
GBP: EUR/GBP heading back towards 0.846
Last week, sterling appreciated against all G10 currencies, most evidently against both the US dollar and the euro following Trump’s victory. The pound continues to be bolstered not only in the absence of Brexit-related news flow but also by promising macroeconomic indicators – notably manufacturing output figures and property prices.
This week, the pound will be bolstered by the UK’s unemployment figure falling to 4.8%, while retail figures are also expected to raise market confidence. In the short-term, sterling has upside potential, particularly if speculative accounts square their short positions.
In the meantime, the market will keep one eye on the UK Supreme Court’s session to decide whether to uphold or reject the High Court’s ruling on a parliamentary vote to trigger Article 50.
If the decision is upheld, sterling will continue to rise in the short-term, even though the majority of parliamentarians will not negate the referendum result. That said, what is important is the market will have a marginally clearer view about the nature of the UK’s Brexit terms by Q1 2017. In turn, this should cause the EUR/GBP to recover towards 0.90 next year.
CHF: new unofficial floor rate of 1.05 for EUR/CHF?
The EUR/CHF has broken below the Swiss National Bank’s (SNB) unofficial floor rate of 1.08, as both the prospect of a QE extension and Italy’s upcoming referendum have weakened the euro.
What’s more, it seems the SNB has not intervened as vigorously in the foreign exchange markets (as in previous months) in order to defend the 1.08 floor rate. Of course, such large-scale interventions are unsustainable in the long-term, given the SNB’s inflated exchange reserves and its corresponding effect on the money supply.
The Swiss franc remains under pressure due to myriad factors, including the country’s bloated current account surplus totalling 10%, Italy’s upcoming referendum, the prospect of a QE extension, and France’s 2017 elections.
Even though the Swiss franc remains overvalued, economic activity is improving – highlighted by both the latest manufacturing PMI (which increased to 54.7 in October) and Switzerland’s trade surplus (which improved following a 4.3% MoM increase in exports during September).
Under these conditions, it may be the case that the SNB has lowered its unofficial EUR/CHF floor to 1.05 from its previous 1.08 benchmark.
JPY: USD/JPY on course towards 110
Last week, like the Swiss franc, the Japanese yen (both safe haven currencies) also weakened as the Trump risk was overplayed.
In this respect, the Japanese yen’s correction was much sharper, with the USD/JPY recovering above 106.5. At present, the pair remains correlated with the US long-term interest rates, which rose sharply amid fears of an inflation rise during Trump’s presidency. By the end of this year, we expect the USD/JPY to nudge closer towards 110 as the greenback’s rally prevails.
AUD: AUD/USD heading back towards 0.745
Last week, the Australian dollar proved somewhat resilient despite the US dollar’s resurgence. The Australian currency was bolstered by a sharp upturn in iron ore prices back above $79/t – its highest value since October 2014. Meanwhile, boosted by rising investment, Australia’s latest macroeconomic data has been marginally better than expected.
Despite these factors, we remain cautious on the Australian dollar for two key reasons; first, a reinvigorated US dollar and, second, the associated risks from weakened Chinese economic growth. Elsewhere, Australia’s non-manufacturing sectors remain fragile. With this in mind, we see the AUD/USD going on to test 0.745.