Trump’s Next Enemy Could be the Strong Dollar
Trump’s pro-America stance may not extend to its currency, says CIBC Strategist Bipan Rai, who foresees the President trying to keep the currency down during his tenure.
From rising due to the enhanced interest rate outlook and Trump’s reflationary fiscal stimulus dream the Dollar has stalled recently, and this appears to be due to a new, more complex narrative emerging.
The new narrative goes something like this: a strong currency is incompatible with a protectionist trade approach since it makes US exports less competitive.
The problem is nowhere better illustrated than in the case of Trump’s arch enemy China.
The strong Dollar has continuously pressured the Renminbi lower, from 6.05 to the Dollar in 2014 to 6.90 USD/CNY in December 2016.
It is now so low the Chinese authorities have had to intervene to try to manipulate it higher – a strange approach from a heavily export orientated country but one explained by the massive capital outflows from panicking investors who do not want to hang onto Chinese investments only for them to be worth peanuts due to the weak currency.
The weak Renminbi, however, poses a problem for Trump who wants the US to reduce the amount it imports – cheap Chinese imports have become even cheaper under the strong Dollar, undercutting US counterparts.
In order to right the balance, it may not be enough to introduce a 20% border tax, and the President may have to enact policies, talk or otherwise attempt to manipulate the currency lower.
“For two decades the US Treasury has pursued a strong Dollar economic policy.
“We find it unlikely the Trump administration will continue to pursue this policy for several reasons.
“The most glaring reason – a stronger USD is not congruent with the administration’s goal of reducing the trade deficit,” said CIBC’s Rai.
Of course, the border tax adjustment will help offset the stronger Dollar and give US exporters a helping hand – but only to the tune of 20%, and a continuously appreciating Dollar will soon eclipse the advantage.
“This has important implications and we expect that grounds for sustained USD gains over the longer-term are shaky. Certainly, there are risks to that view with the possibility of a border adjustment tax, and investors should take precaution to buy hedges when they are cheap. However, we anticipate that the Trump administration will lean against a stronger USD in the coming months and years ahead,” adds Rai.
Rai notes that in the short-term the Dollar remains pressured to the upside due to interest rate differentials based on expectations that the Federal Reserve will raise interest rates faster than anyone else in the future.
However, he also sees the possibility that this advantage will be cut down due to, “the expected pick-up in global CPI pressures suggests narrower policy differentials as the year will go on.”
He also notes how an improvement in manufacturing sentiment globally bodes well for commodities and commodity currencies which could be supported if the trend continues in the future.