The USD has been a major beneficiary of the final result of the US Presidential election. Not only has US Dollar sentiment improved now that no protracted legal challenge will create market uncertainty, but it’s also getting a lift from the direction of current policy measures outlined by the FED and President-elect Donald Trump.
Long time readers will recall that our bullish case for the USD has been based on the theme of diverging monetary policy between the FED and the other G-7 central banks. However, now that Mr Trump is discussing some details about his economic plans, investors are now anticipating favorable fiscal policy measures which are bullish for US Stocks and the USD, as well.
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During the Presidential campaign, both Trump and Clinton promised fiscal stimulus , but Trump’s plan offers more infrastructure spending and tax cuts and could top the $1 trillion mark (or 6% of GDP) by the time it’s fully implemented. At the same time, investors are growing more confident of a FED rate hike next month and the futures markets are beginning to price in a more aggressive FED. On the Friday before the election, market participants learned that US average hourly earnings rose by 2.8% on a year-on-year basis. This is the fastest pace in five years and consistent with rising core inflation pressures.
This policy mix of tighter monetary policy and expanding fiscal policy is the most bullish combination for a currency. The last time the US economy saw this this concurrent policy dynamic was after the 1980 election when the Reagan/Volcker mix sparked a 30% US Dollar rally into 1985; which was the impetus for the Plaza Accord. With little first tier Economic data scheduled in the US, we expect to see the firm tone in the USD and US asset prices continue this week.
