US dollar benefits from the Trump bounce - Natixis

Nordine Naam, Research Analyst at Natixis, suggests that after a very negative kneejerk reaction by the markets of Trump’s victory, the conciliatory speech by the president- elect paved the way for a rebound in risky assets and the US dollar, at the expense of bond markets.

Key Quotes

“The announcement of a $500-$1,000bn plan to develop infrastructures was welcomed by the market, its view being that this signals stronger economic growth along with higher inflation.”

“In other words, the market seems to have deliberately ignored all the protectionist measures advocated by Trump, and which are negative for the US dollar, and focused instead on those positive measures expected to boost the economy. If Donald Trump does not announce protectionist measures before he is sworn into office of 20 January, the US dollar should continue to appreciate, spurred by the prospect of stronger economic growth and the continuing normalisation of the Federal Reserve’s monetary policy.”

“As regards relations with China, Trump’s advisors appears to want to soothe concerns of an eventual trade war, while as regards Mexico, Trumps now talks of a fence (not a wall) and about deporting 2 to 3 million criminals, not something that is going to impress the markets. Finally, the president-elect seems less critical of Janet Yellen and her monetary policy.”

“To this extent, risky assets and the US dollar seem to be reacting much as markets did after the Brexit announcement. In the absence of news, the market is focusing on the short-term outlook and the fundamentals. It can be expected to behave in this way until light is shed on Trump’s economic programme, therefore for several months. In the short term, the market’s attention will shift to the FOMC meeting on 14 December and on the composition of the Trump administration, notably those positions likely to influence economic policy.”

“At this juncture, it is already clear that many of the measures announced by Donald Trump will not be passed even by a Republican-controlled Congress unless they can be funded. In the short term, the greenback will continue to appreciate, with the DXY dollar index set to test 100. We see this index appreciating towards 102 in 2017. It has to be said that the US dollar could rise even higher if US growth proves stronger than expected, bolstered by various measures and/or higher short-term interest rates, spurred by an upturn in inflation.”

“Only the Federal Reserve is in a position to slow the greenback’s appreciation and therefore the decline of the EUR/USD by sounding words of caution and/or if there are negative statements by Donald Trump making a case for more protectionism.”

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