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Making the Dollar Great Again

As of December 2016, the Federal Reserve forecast 3 interest rate hikes of 25bps each in the US, combined with the expected fiscal stimulus from President-elect Trump’s government has led to USD appreciation.

Year-to-date Sterling has been relatively resilient in the face of recent USD strength. This can be attributed to the London High Courts’ recent ruling that triggering Article 50 would require a parliamentary vote. While this may delay Brexit, it is unlikely to prevent it, in Citi’s view.

Emerging Market currencies have depreciated against the USD, following the US Presidential election result. Asian currencies would be vulnerable to any rise in trade protectionism. While China is currently running the largest trade account surplus with the US globally, China has sufficient reserves and a relatively closed capital account to be in a position to smooth any exchange rate moves. Over the next 12 months, we expect the RMB to weaken by 4.2% from current levels.

Key takeaways

  • Over the next 12 months, USD may be 6-7% higher vs G19 and 3% higher vs EM currencies
  • From current levels the RMB may weaken by 4.2% from current levels
  • Sterling may still be vulnerable to further gains in the USD
  • Increased currency and rate volatility is potentially negative for commodity (AUD,NZD and CAD) and Asia EM currencies

 

 

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