Positioning for USD risks beyond the Fed – RBC CM

Analysts at RBC Capital Markets note that the USD rally that followed the surprise election outcome has so far been driven by conventional monetary policy expectations.

Key Quotes

“And arguably, in the absence of more concrete detail on fiscal policy under President Trump, US rate expectations are already rich. But beyond the monetary/fiscal trade-off, there are two further themes we want to capture that markets do not yet seem to be priced for and that may take much longer to play out. Firstly, the FX impact of diminishing openness to global trade, and secondly, the underappreciated impact of a likely tax break on US retained overseas earnings.”

“Since Trump’s more moderate post-election rhetoric, markets appear to have largely dismissed the threat of rising protectionism. The Baltic Dry Index has rallied over 30% since Election Day, which points to an expectation of increased international trade rather than a decrease. We think markets are underestimating how central protectionism is to the new president’s world view.”