I think a combination of protectionism, political (aka economic) nationalism, inflation, Eurozone breakup and US fiscal stimulus are the themes to watch for in 2017. But I am wary of overemphasizing recent themes and projecting them out a full year, so here Doublehit’s views for the next few months.
I believe the year will start favourably and then slowly turn less optimistic towards the middle or end of Q1 as sentiment pivots due to protectionism and the negative impact expected from fiscal stimulus.
The fiscal stimulus planned for 2017 comes from a highly unusual starting point (see chart below). The rise in rates as President-Elect Trump pumps up the leverage with the US non-accelerating inflation rate of unemployment (NAIRU) could easily offset the positive fiscal impulse while the indications from Canada and Japan suggests fiscal spending has a slow fuse and a lessor impact in the current environment. There may even come a point where the rise in US interest rates leads to a rise in interest costs on US government debt that (when coupled with a bunch of new spending) leads to questions about US solvency and a fiscal crisis. I would guess that is a trade for 2020 or maybe 2022?
Stories about “FISCAL STIMULUS” vs. US Continuing Jobless Claims
When the Bank of Canada Governor, Stephen Poloz, started in his role many pointed to his history as a champion of export development as a reason to think he would employ CAD-negative policies. They were right. Bernanke’s academic background was a good predictor of how he would act in the GFC and Yellen’s well-documented conservative personality predicted her restrained FOMC stance. President Obama’s background as a lawyer was a good predictor of the regulatory discomfort in which the US is currently entangled. If we look at the starting fiscal point in the United States, and Donald Trump’s history of leverage and bankruptcy (he has presided over 6 separate bankruptcies since 1992), the idea of a US fiscal crisis in the 2020s does not seem that outlandish. It is not irrelevant right now but something for the long-term radar.
As we end 2016 those Countries pursuing economic nationalism should benefit from the move towards protectionism while those playing the old collaboration game should suffer. This implies a weak EUR, strong USD and strong GBP.
Putting this all together, here are trades that may do well from now until approximately the end of Q1:
Short EURUSD. Empirical issues for the Eurozone come back into focus. The risks to EUR have always been mostly political, not economic, and Mario Draghi cannot impact change in the Italian or Dutch populist landscape.
Short EURGBP. Similar, but different in that the UK economy is performing fine, inflation is high and GBP is being offered at a huge discount (priced for the opposite of perfection). The UK has already felt the impacts of BREXIT while the Eurozone infection continues to exude slowly.
Long USDSGD. Singapore uses an exchange rate based monetary policy so the currency is highly correlated to EURUSD (64%). So if you win on the EURUSD trade you will probably win on this.
Short EURCZK. Inflation is rising globally so the 27.00 floor is making less sense each day. The CNB may decide it’s favourable to go back to a floating currency regime before speculators pile into the floor “SNB-style”.
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