Currencies
All three of Trump's signature policy proposals - increased deficit-financed infrastructure spending, a more restrictive immigration policy, and trade protectionism - are dollar bullish. These policies could cause the U.S. economy to overheat, forcing the Fed to raise real rates more than it otherwise would. Equities could rally in the near term following a Trump victory, but are likely to face stiff longer-term headwinds. Treasurys would still suffer modest losses, while, ironically, the one asset that could suffer the most from a Trump victory is gold.
A Spanish bull, a euro bull, and an equity bear.
While the Fed's recent forward guidance leading markets to increase the odds of a policy-rate hike earlier than previously expected will restrain the recovery in crude oil prices, fundamentals will dominate price formation now that markets have rebalanced.
The Turkish central bank has almost exhausted its foreign exchange reserve. It has been printing money to keep interest rates lower, and sustain the credit boom in the economy. Such policies are unsustainable and the currency will plunge anew. Currency depreciation will push up market-based interest rates. Stay short/underweight Turkish risk assets. A new trade: Short 2-year local currency government bonds.
The window for "stealth" RMB depreciation is likely closed for now. The Chinese authorities are stepping up efforts to boost infrastructure construction with several major announcements last month. Capital spending on transportation infrastructure will likely accelerate at least through next year.
Markets will remain stuck in a trading range, driven by two policy feedback loops: the Fed's and China's.
Both hawks and doves at the Federal Reserve, including Chair Yellen, have stepped up efforts to condition financial markets for a rate hike as early as June.
Long-term fundamentals are often poor predictors of the outlook for currencies over the subsequent 12 months. For shorter time horizons, investors should focus on the medium- and short-term currency determinates introduced in this <i>Special Report</i>.
The BoC will continue to watch from the sidelines. Our short-term model shows that the Canadian dollar is modestly cheap after having reached technically overbought levels earlier this month.
For the month of May, the model underperformed both global equities and the S&P 500. For the month of June, the model is further paring back its risk exposure.