USD: Flying high on wings of wax – SocGen

Kit Juckes, Research Analyst at Societe Generale, suggests that stronger growth, excitement about the potential effects of tax cuts and expectations of faster monetary tightening will take the dollar higher in 1H17, but like Icarus, it’s in danger of flying too close to the sun.

Key Quotes

“It can rise while Europe is beset by political uncertainty and while the consensus is that President Trump will deliver faster growth but only slightly higher inflation, but if political concerns ease in Europe, the euro will likely bounce. If the dollar does some of the Fed’s work for it, if stronger demand boosts the US trade deficit and if real yields are eroded by a further pick-up in inflation expectations, then the dollar rally should grind to a halt. It is not so much a case of Mr Trump having feet of clay, as the dollar having wings of wax.” 

“Where and when to fade USD strength

We expect EUR/USD to trough around parity, before the French elections, unless Front National candidate Marine le Pen wins the presidency (in which case the low would be lower and later). USD/JPY has further to run as the BoJ anchors nominal yields, but above 120, momentum should slow. We expect yieldseeking investors to return to EM currencies from 2Q onwards.”