Trump doubts emerging may curtail USD buying – MUFG

Derek Halpenny, European Head of GMR at MUFG, is wary of how much traction the dollar can get from here on an improving macro-economic backdrop.

Key Quotes

“For starters, the financial markets are now fully priced for FOMC action on 14th December but perhaps adding to that might be some emerging doubts over how the early stages of a Trump presidency may play out. The financial markets took great solace from Trump’s conciliatory words and some signs of backtracking on key campaign promises that would prove divisive. One such example was his hints of reneging on a promise to repeal the Affordable Care Act after meeting President Obama for the first time.”

“However, the announcement that the new Health Secretary will be Tom Price, an ardent opponent of Obamacare who has focused wholly on repealing the legislation increases the prospect of more divisive action than perhaps initially indicated by Trump after his meeting with Obama. Price is also a close friend of House Speaker Paul Ryan, another vocal opponent of Obamacare.”

“Steven Mnuchin is also expected to get the key Treasury Secretary post and may be confirmed today. He ran Trump’s campaign finances but has no political experience and is perceived as someone who would carry out Trump’s campaign promises of aggressive tax cuts and a large infrastructure spending program. That of course has been key to providing support for the dollar and lifting US yields. But there are risks that further sustained dollar strength could become disruptive for financial markets.”

“The 10-year UST bond German Bund spread is now at its widest level since 1989 that raises the prospect of the dollar strengthening to the extreme levels of the 1980’s. Interestingly there is a Bloomberg story today on a “Trump Tower Accord” along the lines of the Plaza Accord to weaken the dollar from excessively strong levels. If Mnuchin does pursue aggressive tax and spending policies to reflate the US economy as Trump has promised speculation on G20 involvement in FX direction is bound to rise and may at some point act to curtail that strength. We should all listen closely for rhetoric on the US dollar from Washington going forward from here!”