Article / 17 February 2017 at 14:38 GMT

Macro Digest: Ready, steady, go on US dollar — #SaxoStrats

Chief Economist & CIO / Saxo Bank
Denmark
  • Trump's administration has revealed few details of its trade and monetary policies
  • The next month will present three opportunities for it to elaborate
  • We remain bearish on the dollar as a strong greenback will kill growth
 
By Steen Jakobsen

We are facing 
major event risks in the dollar direction with three potentially huge announcements:

February 28:
Trump to address a joint session of Congress

March 14-15: Federal Open Market Committee meeting

March 17-18: G20 Finance Ministers & Central banks in Baden-Baden, Germany

Background: The G20 Hamburg Summit priority agenda

********

Trump's struggle to keep the “business” momentum going and falling back on being Trump “the candidate” shows the limited range and output of his administration. 

By this time in February, all of Trump's predecessors had their agenda and economic policy announced – Trump doesn't seem to have a direction and strategy except for “Twitter-attack mode”.

This means he is likely to refocus his efforts leading into one or all of these high-risk events. The most likely – and biggest – risk is his address to the joint session of Congress.

There will be high expectations for a tax policy, the repeal of the Affordable Care Act (Obamacare), and his trade policy – which could include some comments on what he views as Germany and China's unfair forex policies.

"America first" has been Trump's call to action, but it's also been picked up by majority leader Paul Ryan while rallying behind the president's policies. We know it means “protecting” US jobs at any cost – at least on a case-by-case basis – but what is the overall strategy on trade and globalisation?

A pressured Trump is a dangerous Trump, in my opinion. That is, we are more likely to see fallout in our current situation than we would be under a smoother administration.

trump on twitter
 The president's unusual decision to maintain two Twitter accounts has provided some insight into potential policy moves, even if official statements have been scarce. Photo: twitter.com

The focus remains on trade. Trump sees trade deficit as the main culprit in his narrative of US job losses, despite America experiencing below average unemployment.

State Street has done some excellent charts on this issue:

state street




















Source: State Street Global Markets; Bloomberg

I think the charts speak for themselves. But the Germany/US real effective exchange rate basis drifting into the 2 sigma range will, of course, be an issue that Trump and his staff will look to address – perhaps with a Plaza-style Trump Accord? Not so fast, says State Street: 

not so fast





















Source: Bloomberg; State Street Global Markets

The #SaxoStrats outlook remains unchanged. We think Trump will pursue a policy of a weaker US dollar. Whether this will translate into direct policy – that is, by announcing the end of US Reserve status, similar to Trump’s political hero Richard Nixon taking the US off the gold standard in 1971 – could be clearer by the end of March. But in terms of probabilities, this is how we see this playing out: 

• 20% – stronger dollar through no change to policy and the border adjustment tax, which is estimated to make the dollar 15-25% stronger.

• 60% – indirect weaker dollar: Constant focus on other currencies being too weak and the Federal Reserve tightening (which historically means a weaker dollar) and slowing US economic growth .

• 20% – direct weaker dollar: Announcing the US dollar is no longer the reserve currency and forcing either a new Plaza Accord or a similar action by overseas exporters – the 1980s repeating.

Objective

We see the dollar testing the 96.00 level on unchanged policy. If it is confirmed that a weaker dollar is new policy of choice, the dollar cycle could be turning down in a traditional eight-year cycle.

8 year cycle Source: Bloomberg

This is our weekly “model” or trade indicator:

weekly model


















Source: StockCharts.com

It’s short and consolidating, with 96.00/96.70 being the support of the envelope and 100-day simple moving average.

Conclusion

The next month should give us a major indication as to the next direction for the US dollar; we remain bearish because:

Inflation topping: Overall, the peaking base effect in energy will reduce inflationary upside – year-on-year net change in oil prices comes down from +85% now in January data to 5% in May.

FOMC and economy will remain slow: Yellen repeated strong rhetoric based on a dual mandate, but overall the economy continues to sputter on productivity and, hence, growth.

Weighted risk of a weaker dollar policy: Currently at 20%, going up to 80% depending on how it's defined – plus, a stronger dollar will kill growth and inflation in not only US but the global economy.

trump
 In the four weeks since he took office Trump has already proven himself one of America's most vocal presidents, and yet we know little about what his policies or agenda may be. Photo: Wikimedia Commons

– Edited by Jack Davies

Steen Jakobsen is chief economist and CIO at Saxo Bank

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