So much of the next 12 months in the world of currency rests on what happens to the US dollar and indeed as we head into 2017 it is the US economy and the machinations of the US political environment make it a very difficult needle to thread for currency expectations.
We cannot underestimate how important the first 100 days of the Trump presidency really is.
The greenback has rocketed higher in the aftermath of the election and any weakness over the festive period is more likely traders cutting positions and booking profits before they head off for a quick break as opposed to determined opposition to the US dollar.
Once again, we have to think that the market is irrationally exuberant heading into the New Year and while the economic side of the new politics is being fully priced in – US and Chinese stimulus – the political side of the economics – policy mistakes and antagonistic trade stances – are not.
The dollar has made an impressive run but our minds keep circling back to the inauguration of Donald Trump on January 20th as a possible turning point. Markets like to ‘buy the rumour and sell the fact’ and the swelling of asset prices, the dollar and inflation expectations could be a monster version of this trading plan. We cannot be sure until Trump is in the White House and that is in a couple of weeks’ time.
The Federal Reserve found enough strength in the US economy to hike 25bps in December for the first time in 2016. This means basically nothing.
What matters is that the expectations shown in the dot plot charts show a Federal Reserve that is supremely uncertain as to the path of the US economy moves into 2017. Despite this the broad picture of expectations now shows the median estimate now points to three interest rate rises in 2017 as opposed to the two that were forecast in September.
Some analysts are saying this was a hawkish Fed and to be prepared for a far higher USD as a result. We would have to disagree for now but that does not preclude more hawkish noises coming especially should the fiscal stimulus that everyone want to know about, actually comes to pass.
For now they’ve noted the strength in inflation and the jobs market but this is a central bank eager to know what kind of administration they will have to work with and balance policy against. Until we get a flavour of that there was little chance of them basing policy on the pronouncements of someone who has a somewhat casual relationship with consistency.
We continue to view the USD as an asset that wants to rise. The Federal Reserve left a lot of room in its statement and the comments of Janet Yellen for dollar appreciation.
Broad based dollar buying emerged as soon as those dot plots showed an extra rate rise next year and for now there looks like little that can get in its way.
The only caveat that we have in the short term is that while holding USD is a very crowded trade right now, the number of people expecting a pull back soon on the basis of the greenback being overvalued is also very high. It’ll just take one thing to start to reverse this trend but that will likely have to come from the data or from Trump Tower for now.
In the meantime, there are few out there who would wish to stand in front of the freight train that is the USD.