USD: Can the post-election rally extend further? – RBC CM

Research Team at RBC Capital Markets, notes that since the US election, USD is up against every single currency in the world apart from GBP.

Key Quotes

“The clearest loser is MXN, but several other EM currencies have been hit hard (in order of losses: ZAR, BRL, COP, TRY, PLN, HUF). In G10, JPY, NZD, and AUD are the biggest underperformers. Trade-weighted USD is up at least 3% in the last week (on some measures closer to 5%).”

“In part this is a conventional monetary policy story. Since the election, markets have moved to all but fully price in a December Fed hike; more importantly, they are now pricing in more than another hike for 2017. The steepening of the money market curve is in stark contrast to the parallel shifts that have dominated for most of the last year.”

“Underlying this is an expectation that the combination of a Republican President and a Republican Congress will lead to substantial fiscal easing (in the form of tax cuts and infrastructure spending) as well as deregulation. That in turn would require more aggressive monetary tightening. Markets have also reacted positively to the less confrontational tone from the president-elect, focusing on his acceptance speech, his first major interview for 60 Minutes, and his choice for Chief of Staff (the RNC Chair, widely seen as a moderate Washington insider). Finally, we are now much more likely to see changes to the tax on overseas corporate earnings, which could lead to a repeat of the 2005 Homeland Investment Act (HIA) experience. We generally agree with the positive USD outlook, although in our view there are some pairs where it has overshot and some where it has not moved far enough.”