USD: The First 100 Days: Getting ‘Dizzy’ With It – BofA Merrill

We have been flagging short-term risks to the USD rally this year and we got a taste of it this week. USD has been gradually correcting lower, but the bigger push came from President Elect Trump’s press conference on Wednesday. The event provided no new information on actual policies, but markets were disappointed by the lack of detail and the aggressive rhetoric against free trade. It also seems to us that part of the market may have been expecting Trump to change his style of leadership and communication after the elections, but this is wishful thinking in our view.

Beyond the very short term, the USD outlook will depend on what the new US administration will deliver during the first 100 days, in our view. A clear message from Trump’s press conference was that he wants to get things done fast. Fiscal stimulus will be USD positive, trade protection will be USD negative, particularly against JPY and EUR.

Good polices (fiscal spending and tax reform) will give a further boost to the Trump trades. Bad policies (trade tariffs and obstacles to FDI) could trigger a sharp correction as markets are disappointed. As our economists’ year-ahead report argues, “things can go so right…and so wrong”.

We remain constructive on the USD for the year, but admit that uncertainty is particularly elevated. Our projections assume that the new US administration will deliver on fiscal policy but will not follow through with threats on trade policy. We are fully aware that this is a positive scenario and, at a minimum, unlikely to be smooth.

This partly explains why our USD projections are not very aggressive at this point, having USD/JPY at 120 by end-2017 and EUR/USD first weakening to 1.02 by mid-2017 and then strengthening again to 1/05 by the end of the year.