Laura Sarlo, Senior Sovereign Analyst and Tom Fahey, Senior Global Macro Strategist
From Election Day in November through the end of 2016, financial markets embraced the “Trump Trade,” pricing higher equities, higher interest rates and a stronger US dollar.
So far this year, two legs of the Trump Trade remain intact:
- US equities have continued to march higher as optimism grows for improving corporate profitability.
- Bond yields have retraced some of the post-November gains, but at 2.49% the current US 10-year Treasury yield is still more than 60 basis points higher than the 1.8% seen just before the election.
However, the trade weighted dollar has dropped 4%, losing 5-7% against many emerging market and commodity-related currencies. We view the recent depreciation as a correction in the dollar’s primary trend toward appreciation. The dollar is likely to remain supported by easier fiscal policy, tighter monetary policy and the ongoing economic expansion. Most notably, we expect tax policy decisions published over the next month will be the major catalyst for the dollar for 2017.