USD Strength, ECB tapering, GBP and Commodity Currencies

The prospect of looser fiscal and tighter monetary policy has propelled the USD higher since Trump’s election. Our baseline assumes Trump’s trade policy is one of pragmatism over antagonism and that USD remains modestly bid through 2017. Risks to that view primarily stem from Trump talking the USD lower or the Fed backing away from tightening in light of USD strength.

The ECB has delivered a cute policy of tapering while keeping EUR strength in check. Eurozone politics can now drag EUR/USD close to parity in 1Q17. Yet assuming Le Pen does not win in May, more ECB tapering next summer, plus extreme under-valuation, can send EUR/USD above 1.10 by the end of 2017.

Elsewhere in Europe, London’s collision course with Brussels suggests current EUR/GBP weakness be used to hedge against a future GBP sell-off. A difficult fixed income environment in 1Q17 will leave bond-sensitive currencies such as PLN and HUF vulnerable through the early part of the year.

Commodity currencies have been performing a little better as global demand prospects improve. RUB and BRL remain our top picks in this space. Further commodity FX strength assumes that the PBOC is successful in keeping USD/CNY under 7.00 and suffering some CNY strength against the basket.