Mr Trump: Careful what you wish for - SocGen

Research Team at Societe Generale notes that the President-elect has been very vocal about international trade, threatening to toughen up the US stance, brand China a currency manipulator and impose sanctions or tariffs.

Key Quotes

“Yet his policies risk pushing the US dollar even higher – making it even tougher for US-based corporations to compete on global markets. Indeed, income and corporate tax cuts (a near certainty), infrastructure spending and regulatory easing should support growth at a time when the economy is already running in a tight capacity environment, at least in labour markets, where wages have clearly started to rise. The USD will fall if the Fed fails to react to the rise in inflation. Instead, the Fed is likely to normalise policy at a faster pace, which should push real rates higher and further support the USD. Mr Trump himself has complained about Fed rates being too low.”

“There is little doubt that, from an FX point of view, a US policy mix skewed towards more expansionary fiscal policy and tighter monetary policy is bullish for the USD. The question is whether the USD, at a new cycle high and already rich relative to fair value, has already front run that policy shift. And this makes our bullish USD views relatively moderate from here. Yet we see more room in this overshoot, as the rising yields and strength are likely to exacerbate USD scarcity.”