Euros – Mosaica FX

The Dollar TRUMPS Losses

With Bullish Gains Forecast!

For many in the financial markets, this past week’s Presidential election was the definition of uncertainty and volatility. In fact, as the November 8^th election day rolled into early evening, the Futures Markets fell lower with each State Mr. Trump succeeded in putting in the “win,” column.

Every financial correspondent on television (with perhaps the exception of Fox Business News Maria Bartiromo) claimed that if Donald Trump was elected President we could expect our own version of Brexit with regards to our financial instruments. Some even smugly referenced this potential calamity as “TRexit!”

No doubt that by the end of the evening, the Futures Markets lay bloodied and battered almost beyond recognition. However, to quote Bartiromo during the day long rally of those markets, “…..Once the trading industries and their advisors actually familiarized themselves with Mr. Trumps business plans for the future, they realized that his actions would be good for business in America!” Thus as we have seen time and time again, the “markets,” often reflect emotional reactions as opposed to intellectual analysis of market stimuli.

That being said, many are still nevertheless wondering what the future will bring with regards to the currency exchange markets, post Donald Trump President-Elect. Even more specifically, what can be expected for the U.S. Dollar? While it may be hard to fathom for some, some of the most savvy currency strategists at Goldman Sachs, remain unabashed U.S. Dollar “Bulls,” post election.

7%!

Robin Brooks, Silvia Ardagna and Michael Cahill, senior currency strategists at Goldman Sachs believe that the U.S. Dollar is likely to gain a further 7% on a trade-weighted basis over the next three years! The basis for their call is simple. They believe acceleration in inflammatory pressures in the United States will see interest rates rise at a far quicker pace than are currently forecast in the markets.

Such an action would of course strengthen the Dollar on all fronts. It is their contention that inflation is likely to be somewhat higher in 2017. While world markets and foreign economies may help to fan the smoldering embers of inflationary concerns, the Goldman Sachs trio believes domestic considerations may also play a key role, as noted in their released statement:

“There is upside risk from the fiscal stimulus, while there is downside risk from

an escalation in protectionism. But, in either case, inflation is likely to be higher

than before, which is what has probably helped drive inflation breakevens up.

As a result, market pricing for Fed hikes has risen sharply, with tightening priced

through September 2019 now 86 basis points, almost a full hike more than at

points before the election.

Our point here is not that risks don’t exist. Of course they do. Instead, it is that

policy mix has shifted in the direction of more inflation, which means that-

given how dovish market pricing has been-there is room for the Dollar to

catch up with where it should have been quite some time ago.

Our US team forecasts three hikes next year in addition to the one now

likely in December. This is more than double what is priced and underpins

our forecast for the Dollar to rise around 7% on a trade-weighted basis

over that horizon.

To paraphrase their statement, Goldman Sachs believes that the stated policies of the incoming Trump Administration will “reset” the U.S. Dollar rally that first began in earnest over 24 months ago. In addition, the Goldman Sachs team forecasts that the Fed funds rate will approach 3% by the end of 2019. Such action would certainly also support a strong U.S. Dollar.

Dollar and Euro Parity?

Many other currency specialists also believe that as a Trump Administration will end current domestic financial policies that have unfairly “yoked” business in the U.S. in favor of a high-spend….low-tax approach, the Dollar will also benefit from that effort. In fact, some expect the Dollar to rise to a direct Euro parity! Given the fact that the US Dollar Index, which measures Dollar value against six (6) major currencies, has risen more than 1 percent this week alone, their projections may be valid.

Bilal Hafeez, Global head of G10 FX Strategy at Nomura, told CNBC Thursday, “….I expect the Dollar to continue strengthening, particularly against the Euro.” He went on to say, “….We see $1.05 for Euro versus Dollar by end of year but a move towards parity within six to twelve months is entirely possible.”

G10 Strategy at Nomura also believes that given the election calendar for Europe over the next three to six months, it is possible for non-establishment parties or policies to also impact the value of the Euro. This may result in a “squeezing” of the Euro against the Dollar from both sides.

As the new Trump Administration pledges to spend heavily on infrastructure and national defense while also cutting taxes, one of the most probable ways to fund those efforts would be for the U.S. Government to auction off more government bonds…… “sweetened” with higher rates of return. This would have a positive effect on two fronts. First, it would make these spending programs financially feasible and second, by getting investors to buy those Dollar-dominated bonds, the value of U.S. Dollar currency would rise as well.

In addition, Elias Haddad from Commonwealth Bank told CNBC this week that Trump’s pro-growth economic policies could force the Federal Reserve to raise interest rates at a faster pace in order to check potential inflation concerns. This means a faster timetable towards higher rates will also raise the value of the Dollar.

After reviewing literally dozens of informational services and respected economists statements this week post election……..the overwhelming position taken is that the U.S. Dollar is poised for a strong bullish trajectory over the next 12 months. While this may not mean that it could still falter with unexpected domestic challenges or other negative global actions, at this point conventional wisdom seems to be that currency rates regarding the U.S. Dollar are set for a strong performance.

Perhaps, the U.S. Dollar will TRUMP the Euro and currency weakness after all!

Brexit…Update No. 3

It has now been over four months since the EU shattering Brexit vote where the will of the UK citizenry declared themselves free from the constraints of the European Union’s economic shackles.

As many stalwarts of the EU had proclaimed the immediate and disastrous downfall of the UK’s economy based solely on the vote itself…..we figured it was time that we take a brief glance at the latest reverberations that were ignited by that historic vote. You may be somewhat surprised by what we found.

UK economic growth did indeed slow down following the vote in June…but less than predicted. The Office for National Statistics said GDP grew in the UK by 0.5% in the third quarter (July to September), compared to 0.7% in the previous quarter.

Chancellor Philip Hammond stated, “…The fundamentals of the UK economy are strong and today’s data shows that the economy is (quite) resilient.” The Chief Economist for the Office for National Statistics said, “…..There is little evidence that Britain’s vote to leave the EU had a pronounced impact on the UK economy do to Brexit.”

The other notable quotes attributed to the Chancellor were also positive as a whole. “While quarterly growth has fallen slightly, the economy has continued to expand at a rate broadly similar to that seen since 2015 and there is little evidence of a pronounced effect in the immediate aftermath of the vote,” said Hammond. He went on to note that the “dominant” services industries continued to offset “further” falls in new construction while manufacturing “continue” to remain overall flat.

Positive Outcomes Exceeded Negative Expectations!

As a consensus forecast of economists had predicted a “post Brexit” growth rate of just 0.3%. This anemic number had been broadcast daily leading up to the actual vote as an expected result if the UK opted to jettison the EU relationship. In fact, many economists in the UK government had actually indicated that if Brexit carried the day, the country would be “lucky” to see a 0.3% rate of GDP growth! Hence, a growth rate of 0.5% was seen as a welcome surprise.

On a year-to-year basis, growth was also higher than expected, with UK GDP 2.3% higher over the course of the last 12 months, again…..compared to a forecast of only 2.1%. Once again, this was considered an unexpected positive for the economy. Many also saw it as a repudiation of the naysayers who claimed a negative economic impact was almost assured post-Brexit!

While the data obviously makes a positive first statement, as Samuel Tombs of Pantheon Macroeconomics points out, preliminary GDP estimates, due to the very nature of their reporting, often overestimate growth, so that number could easily be revised downwards a bit at the next update.

As inflation has surged higher in the UK as a consequence of the pound’s fall in recent weeks, this may also fuel some future Brexit fall-out. To be specific, inflation hit 1% in October, the first time in close to two years it reached a full measured point. It is possible that inflation may continue to climb as the result of the pounds drop will be fully felt in the months to come. Some economists believe that inflation could eventually touch 3.0% – 3.5% in 2017. As Tombs stated recently, “….the adverse consequences of the Brexit vote will become increasingly clear as (if) inflation shoots up and firms postpone investment over the coming quarters.”

Coutts Countenance

As Coutts Investments has stated, the pound remains the biggest economic casualty so far since Brexit. Since it plummeted in the days following the vote and has languished at multi-decade lows ever since, the result has been the birth of the current rise in inflation. However, Coutts states in their latest investment overview, “…..We think (the) Sterling may be pricing in too much pessimism ——we don’t see a UK recession looming and we believe the longer-term impact of Brexit on the economy would not be disastrous.”

Coutts went on to note, “…..Though the ultimate impact on the UK’s long-term future remains uncertain, we believe currency markets are too pessimistic.” Measured in various ways, the Sterling looks cheap by long-term standards making the UK assets more affordable for overseas buyers. This would be expected to invigorate investments flowing into the UK, thus driving the Sterling higher eventually. While this may take a while as the process of leaving the UK unfolds, it still seems to represent a minimally damaging effect in the long-term.

While much of the complete picture of the Brexit impact is still poised to unfold, there are two very important points to not overlook at this time. First, the UK is still standing. It did not vanish in a black puff of smoke and in fact, it so far seems to be weathering the storm quite well. One must always remember that the British are a tough lot. They have always been a proud people and are not easily brought to their knees. Second, the real test will be when Prime Minister Theresa May begins the actual technical process of “unspooling,” the UK from the EU. IF, that surgical procedure is done with great skill it will no doubt minimize the potential negative outcomes many believe are still on the horizon. As in any complex procedure…the operation can be a success…but you can still lose the patient.

Only time will tell… if GOD and Theresa May can save the Queen!

Tag: Euros