The Dollar is likely to trump under Trumponomics | Phillip Futures Research
US President Donald Trump’s pro US business policies, or Trumponomics, has been a positive catalyst for growth in the US Dollar and the US economy. However, others still view his policies as protectionistic and this has caused some tensions between US and their trading partners, and had previously sparked a sell-off in the USD in 2017.
That being said, we feel that the USD has been showing signs of bottoming in 2018. After declining almost 10% in 2017, the dollar index has started trending higher, despite the recent headwinds.
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Over the past few weeks, fears of a trade war resulted in markets nosediving. This came after Trump announced that he would be implementing tariffs on steel and aluminium imports.
Nonetheless, this proved to be a knee-jerk reaction as the USD rebounded after President Trump softened his stance, and opened up to private negotiations. In fact, he even waived tariffs for countries such as Australia.
Going forward the USD is poised to see further strength due to 3 factors.
1) Potential repatriation of overseas funds by companies to the US.
President Trump’s Tax Cuts and Jobs Act in 2017, gives corporations a one-time off tax payment of between 8-15.5%, instead of the usual 35%, for cash repatriated to the US this year. This has prompted major corporations such as Apple, to announce their intention to return foreign earnings – left in foreign banks as stockpiles – to the US. With fund inflows to the US, the demand for USD is expected to increase, though when this is expected to happen is still an unknown.
2) Upcoming US mid-term elections in November.
At present, the Republican Party –Trump’s political party – controls both the House and Senate, and President Trump would want the Republicans to retain control of both the House and Senate after the mid-term elections. That would in turn, make it easier for him to implement policies during the remainder of his term.
As such, it is expected that he would be inclined to woo electors with a strong USD and a stronger US economy. If the USD strengthens, the US citizen’s purchasing power would increase as well. This would in turn lead to confidence in the current government and increase the Republican’s chances of retaining both the House and Senate.
3) Fed Chairman Jerome Powell’s optimism about the US economy.
During his median address, Powell indicated that further gradual rate increases would be the best way to strike a balance between the risk of an overheating economy and keeping growth on track. This indicates the Fed is cautiously nominalising their interest rate, and shows that there is no immediate shift towards a faster pace of rate increase, despite the potential increase in deficit from the recent tax overhaul and government spending plans. This would act as a catalyst to strengthen the USD, without throwing markets into chaos.
With these 3 factors, we feel that the USD is expected to show further strength in 2018. At the same time, a potential headwind from China’s decision on US treasury purchases, could result in short-term selloff in the USD. If China decides to reduce its purchase of US treasuries, it could point to a lack of confidence in the US economy, and put selling pressure on the USD.
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What about the SGD?
Comparing the USD to the SGD, we feel that the USD will strengthen against the SGD after the MAS monetary policy decision later this month.
The SGD has strengthened due to expectations that the MAS would tighten its monetary policy during its April review. However, the SGD may lack further catalyst to strengthen further beyond that.
Economic numbers released so far have been lacklustre as compared to last year, and growth is expected to slow down from its high base. Unless there is unexpected growth in the Singapore economy after April, the USD is expected to strengthen faster than the SGD.
Furthermore, if the MAS does not tighten monetary policy in April, we may see a sell-off in the SGD as the markets have already priced in the tightening.
This research is kindly contributed by Phillip Futures.
Phillip Futures is one of the region’s top brokerages for the trading of global futures, foreign exchange, energy, metals and commodity futures. It was established in 1983 as a member of PhillipCapital Group, and was one of the founding clearing members of Singapore Exchange Derivatives Trading. It currently holds the Capital Markets Services Licence issued by the Monetary Authority of Singapore (MAS).
Phillip Futures is also the first to launch the powerful MetaTrader 5 (MT5) platform in Singapore. MT5 offers advanced technical analysis tools and allows traders to create their own trading strategies.