The consensus around 2017 being the year of the dollar has clear vulnerabilities, according to Bloomberg's Mark Cudmore, who notes that there’s a strong self-correcting impulse to dollar strength.
I’ve just returned from a week in New York that included meeting a number of FX traders from several different firms. And the one view that was repeated again and again, with conviction, was that next year will see the dollar roar.
Expected U.S. rate hikes are seen as key to this idea, based on the fact that inflation is really taking off. But an appreciating greenback will soon provide a disinflationary impulse, which will counteract some of the need for higher interest rates. An example: the strong currency is already eating into the value of the 44% of S&P 500 revenue that comes from outside the Americas.
There’s a lot of faith in an expected Trump policy to incentivize the repatriation of corporate profits but there are many potential flaws in using this as a trading guide already. What will the actual policy be and when will it be implemented? Will lawmakers back it? And there’s speculation that much of these cash piles are already in dollars, so the FX impact will be minimal.
For those who are buying the dollar because Trump will boost growth and investment over savings, it’s important to note that this will only increase the U.S. current account deficit. That’s ultimately going to be dollar negative, albeit on a longer-term horizon.
It was interesting to note that the dollar weakened yesterday after the strongest ISM print in more than a year. Maybe positioning is already quite stretched?
That said, it’s probably ill-advised to fight the core trends at this time of year, but it’s tempting to think that 1Q 2017 may provide excellent opportunities to selectively fade dollar strength.
There are enough other currencies with obvious problems right now -- think Turkey’s lira and Japan’s yen -- that there’s no reason to be particularly dollar bearish. But it would be equally as foolish to believe that the rate of appreciation since the election, at an annualized pace of almost 60%, can sustain.