2016 was the year of Brexit and the election of Donald Trump. The politics have only just begun however and we are set up for one of the most interesting and unpredictable years of geopolitical pressures and macroeconomic forces on currency in living memory. 2017 will be the year of Trump, China and tax cuts, Article 50 and Brexit negotiations, French and German elections and a lot more in between. The dollar is strong but can it get stronger?

2. • DJT to be inaugurated on January 20th and so starts his ‘First 100 Days’
• Can he row back on China and yuan? Does he want to?
• What will stimulus plans look like?
• Homeland Investment Act MK II
• Probably the most important ‘First 100 Days’ of a Presidency since WW2
• What is the first gaffe and how does the market react?

3. Source: Bloomberg
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Tradeweighted USD only back to 41 year average
Tradeweighted USD Average since 1975

4. • Swaps curves have been boosted of late but nerves sit around Trump stance
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FOMC Dots Median OIS - As of Meeting Date OIS - Latest Value

5. • Make-up of the Fed can easily change from wholesale dovish institution
• The rises in oil prices eliminate the only large depressant on inflation measures in the US.
The Federal Reserve will be battling against inflation returning to target sooner rather than
later, alongside a strong USD
• Will want USD to behave itself or risks of financial instability increase

6. • Germany – Anti-immigration AfD party performing well in recent local elections
• Greece – resumption of bailout worries following slow reform progress since beginning of
2016
• Netherlands – PVV still leading in polls but lead had slipped in past few months
• Italy – banking reform desperately needed
• France – Le Pen still riding high in first round polling. 2nd round a little more mixed

7. • Euro should continue to weaken in the short term
• As it stands at the moment we think that markets are overstating the longer-term political
risk within Europe but near-term we see significant weakness in the single currency,
especially against the USD. The referendum loss of the Italian government has caused
traders to further price in populist pressures in 2017.
• For now, our estimates remain that centrist, status quo parties actually carry French and
German elections with those in the Netherlands more difficult to call at the moment. We
see the chances of a populist win (PVV, Front National or a Merkel loss) in the Netherlands
at 50%, in France at 25% and in Germany at 20%.
• We see EURUSD breaking parity in H1

8. • For all the heat and noise from the referendum and the near 6 months that has passed
since that morning in June there are few things that we are more certain of than the UK
went to the ballot box. We know that Article 50 will be invoked by the end of Q1 in all
likelihood and that will start the stopwatch on two years of negotiations.
• Everything else is up for debate and, more pertinently, negotiation.
• We were wrong in our assertions that the UK economy would immediately suffer as a
result of the Brexit vote but the economic data remains balanced on a knife edge. Heading
into 2017 it is inflation that worries us the most.
• We think that CPI could easily break 2.0% in Q1 but BOE reaction will need to be limited

9. • Is sterling oversold? Absolutely. Does that mean that it cannot go any lower? Absolutely
not.
Source: Bloomberg
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Tradeweighted GBP

10. • While the pound has only been weaker on a trade-weighted basis twice since the end of
Bretton Woods, the nature of Brexit and its existential risk to the UK’s position in the world
and its trading relationships across the globe arguably make for a more complicated policy
cocktail than anything we have seen before.
• We believe that upside to sterling will return, possibly by the end of the year, although this
depends almost exclusively on an easy path of negotiations between the UK and the EU.
We think it is therefore prudent to wait until the government has laid out its negotiating plan
before becoming bullish on GBP.

11. • On the campaign trail Trump threatened to label China as a currency manipulator on his
first day in office. He can do this unilaterally provoking an instant 15% tariff on Chinese
goods into the US for a period of 150 days. We would wager that such a measure would
lead to a modicum of reprisal from Chinese authorities (sales of iPhones for example) and
damage would be wrought on both economies.
• Once again we have little knowledge about Trump’s willingness to doggedly pursue these
reforms once in office and risks remain that China will feel the need to meaningfully
stimulate their economy via both additional fiscal spending and looser monetary policy
despite concerns over their longer term effects.
• The People’s Bank of China will be, alongside the Federal Reserve, the most important
central bank in 2017. The manipulation and movements of the yuan will be crucial to how
well China weathers any trade or Trump driven storm. The final few months of 2016 have
seen the RMB lose around 3% of its value against the US dollar. We anticipate this to
continue in 2017 with a breach of 7.00 in USDCNY in Q1.

12. • A higher USD is bad for the RMB for many reasons but the key driver remains market
expectations of a collapse in the spread between US and Chinese interest rates as the Fed
deals with Trump driven inflation and the Chinese keep things loose to stave off any
damage to growth
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US yield picture pushing CNY lower
CNY/USD China 2yr - US 2yr Source: Bloomberg

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