USD: Back to the 80s - ING

Chris Turner, Global Head of Strategy at ING, suggests that the markets are expected to back Trumponomics with a benign dollar rally and highest conviction, among array of Trump policies, is corporate tax holiday while protectionism and risk of White House talking down the dollar pose risks.

Key Quotes

“Making sense of Trump’s policies

• Donald Trump has offered a mixed bag of policies to ‘Make America Great Again’. The job of the market is to interpret which policies will see light of day and how the dollar will react. The potential dollar positives, to which the market subscribes so far, are the kind of reflationary fiscal policies last seen under Ronald Reagan in the early 1980s. The potential dollar negatives are President-elect Trump’s isolationist stance to world trade and presumably his resistance to a sharply stronger dollar – where dollar strength would undermine Trump’s support for the neglected US manufacturing sector. 
• While Trump’s fiscal plans may not fully echo those of Reagan (we see tax cuts more than government spending driving the fiscal thrust), it looks as though Trump’s plans will continue to drive the dollar higher through 2017. We say this because the Trump policy most likely to be enacted looks to be a US corporate tax holiday. This certainly was the impression we received during a very recent US corporate marketing trip. 
• Since the Global Financial Crisis, US corporates have amassed more than US$2trn in retained overseas earnings. An early announcement in 1Q17 of a tax holiday, which could see US corporates repatriate funds at 10% instead of 35%, should help the dollar indirectly through raised expectations for US share buybacks and dividends, if not capex as well.”

“How far, how fast?

In terms of a profile, we see Trump’s inauguration and first budget in 1Q17 triggering an overshoot in US 10-year Treasury yields to the 2.75% area. This could drag the dollar another 5-7% higher. Fiscal conservatives providing a reality check to Trump’s aspirations could well subdue the dollar over the summer. But after 50bp of Fed hikes, speculation over the Fed shrinking its balance sheet, and tax cuts raising 2018 US GDP forecasts, the dollar should stay relatively supported, at least against JPY, into year-end.”