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Singapore - After getting caught out by Donald Trump’s election, strategists in the world’s biggest market are now divided on where the dollar will go once he takes office.
UBS Group AG, the world’s largest private bank, started advising its wealthy clients to sell the dollar and buy euros after Trump’s surprise victory this month. That contrasts with calls from Deutsche Bank, Germany’s largest bank, for the greenback to surge to parity with the common currency in 2017.
The opposing views underscore growing divisions in the $5.1trn foreign-exchange market, which was bracing for rival Hillary Clinton to win one of the most divisive US presidential elections in decades.
In the wake of the November 8 vote, one-month historical volatility for the euro-dollar pair climbed above implied price swings for the first time since September, while 10-year Treasury futures volume reached a record on the outcome, signaling how unprepared traders were for Trump’s ascendancy.
“The distribution of economic outcomes has widened with a Trump Presidency,” said Eric Stein, Boston-based co-director of global fixed income, who helps oversee about $330bn at Eaton Vance. “There’s potential for significant market reaction in both directions.”
Investors are scrambling to decipher the impact of the president-elect’s promised policy mix. While a program that includes spending as much as $1trn on infrastructure is set to boost US growth and spur the Federal Reserve to speed up interest-rate increases, the sort of protectionist stance Trump touted on the campaign trail is likely to weigh on the dollar.
Momentum indicators hovered at levels that signal the greenback may have moved too far, too fast. The dollar has tracked Treasury yields higher on speculation that Trump’s promise of fiscal stimulus will fuel inflation. But his protectionist trade policies could ultimately hurt the global economy.
Strategists have torn up their predictions for the dollar. While HSBC and Standard Chartered turned more bullish on the US currency against its Japanese counterpart.
Sumitomo Mitsui Banking lowered its March forecast for the dollar to ¥103, from ¥107. The greenback has surged more than 6% since November 8 to ¥110.07 at 07:42 on Wednesday. Against the euro, the US currency has appreciated about 4% to $1.0624.
“A higher dollar and protectionism aren’t consistent with each other,” said Yoichiro Yamaguchi, Sumitomo Mitsui’s head of research in Tokyo. “There will be a correction in the market.”
The 14-day relative strength index for the dollar-yen climbed to almost 80 this week, above the 70 mark that signals the greenback may be overbought. The momentum indicator for the euro fell to 27, indicating it is oversold versus the greenback.
UBS selling
After Trump’s unexpected win, UBS started selling the dollar versus the euro for clients who have given it the mandate to manage their assets, said Simon Smiles, the bank’s chief investment officer for ultra-high-net-worth individuals.
It raised on November 9 its forecast for the common currency to $1.15 in six months, from $1.14.
The dollar’s rally is an “overshoot and will reverse,” Smiles said.
Deutsche Bank analyst George Saravelos has the opposite view, predicting that the euro will slump to 95 cents at the end of next year. More fiscal and regulatory easing would boost growth and push the Fed to raise rates more quickly, he wrote in a client note this month.
Late Monday, Trump released a video outlining his agenda for “the first 100 days” of his presidency. On “day one,” he said, he would take executive actions to withdraw from the Trans-Pacific Partnership trade deal, cancel “job-killing restrictions” on energy industries, and issue a rule requiring that “two old regulations” be withdrawn for every new one his administration issues.
“The dollar is set to remain strong in the first half of next year as financial markets focus on looser fiscal and tighter monetary policy in the US,” said Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland.
“The risk case for the dollar will come if Trump instead prioritizes trade re-negotiations and tightening immigration controls.”
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