USD: The unpredictability of Trump is a key pillar of bearish dollar view - ING

Viraj Patel, Research Analyst at ING, suggests that while unconfirmed reports that China are looking to reduce their US Treasury holdings added fuel to the start of the year sell-off in global bond markets yesterday, they remain somewhat reluctant to chalk this to the current list of reasons for upside risks to global bond yields (ie, rising inflation expectations due to higher oil prices and global QE taper talk).

Key Quotes

“Chinese government officials have since played down these reports – noting that they are merely looking to diversify their FX reserve holdings. But even reasons for doing this are a telling sign of the USD’s medium-term attractiveness – and not too dissimilar to the broader reasons that we have outlined before. For a US economy in the latter stages of its economic cycle, structural factors like the twin deficit risks – as well as the ambiguous economic and repatriation effects of the GOP Tax Bill, relative US asset valuations and the better goldilocks investment opportunities outside of the US – is why we think the $ is losing its status as an investment currency.”

“But equally a fragile US political environment ahead of the November midterms also reduces the USD’s investment appeal. The unpredictability of an ‘America First’ Trump is no doubt an unnerving factor for global investors. The President’s State of the Union address later this month could well be a defining moment for markets in 2018; as we’ve seen with NAFTA break-up noise (albeit quashed rumours), we believe a more anti-trade, ‘America First’ policy focus would be negative for the USD – especially against the current account surplus currencies like the EUR (end-2018 target of 1.30) and JPY (outside risks of a move to 100-105 by year-end). Any correction higher in DXY likely to be limited to 93.00.”