It's not a bad moment to take stock of what's gone and what might be in store, poised as we are between the anniversary of Donald Trump's election victory and that end-of-year period when traders will have to offer their predictions for 2018. As a sweeping generalisation, equity market forecasters will remember 2017 a lot more fondly than their currency market equivalents, given how many of the latter were calling for a rampant Dollar. Of course, they would argue that any trader worth his salt should be able to recognise changing dynamics in double-quick time and adapt his or her trading strategies accordingly ..... that's true, but the early part of the year must have been a bit painful for quite a few of them.
It's worth reminding ourselves just what was going through investors minds one year ago, and how much of a disappointment subsequent events must have been ;
As soon as the markets had overcome the shock of a Trump victory, which took all of a few hours, they refocused their attention on what it really should mean for the fundamentals that drive the fortunes of the Dollar. Most of them settled on the scenario that the new president would quickly bring about inflation-generating infrastructure spending (which of course would hasten the climb in interest rates), and tax reform. The policies would support both the economy and the Dollar.
The US unit was already flexing its muscles, but the new enthusiasm provoked end-2017 predictions as low as parity for EUR / USD, and as high as JY135.00 for USD / JPY. In the event, the new administration has managed to achieve little of substance and even after some dollar support in recent weeks, EUR / USD now trades above 1.18, and USD / JPY below 113.00. However quickly those forecasters of nearly year ago might have reacted to change their predictions, you've got to think that the experience has been an uncomfortably expensive if instructive episode for them.
The Dollar's small bounce recently was largely based on revived hopes for significant tax reform, but the problems that the administration is facing in getting the reforms passed into law only add to fading confidence in their ability to get things done. Besides, many now question how much a cut in corporation tax for example would lift business investment. It would benefit profits certainly, but it's doubtful that much of the increase in profits would be reinvested into companies so late in the business cycle. There are also those wondering whether Mr Trump's promised fiscal spending package (where is it, by the way ?) is actually needed -- the economy seems to performing pretty strongly without any major input from him or his missing agenda.
Hang on a minute ..... aren't we in danger of arguing against ourselves here ? If things are going so well, doesn't that mean that there's a good case to be made for once again buying the Dollar ? At the very least, a 17-year low in unemployment must at some point spark a significant rise in wage growth, which in turn will translate into inflation (at last) and more upward pressure on interest rates.
There's nothing wrong with that line of thinking, just as the views being put forward a year ago were perfectly logical. There is a difference this time though, in that growth is now a global story and not just a US one. In particular, the data in the Eurozone on growth and economic confidence is arguably even more impressive, and unemployment numbers are falling fast (albeit from a much higher starting point). The ECB may be keen to present a doveish front with lots of references to their cautious approach to "tapering" QE and even keeping the QE taps open as long as required, but it could very well be that ECB tightening in 2018 is a bigger story than Fed tightening.
It would only be sensible to point out that a period that includes wholesale changes in personnel at the Fed such as we're entering now, is not an ideal time to placing large bets either for or against the dollar, and let's face it prevailing end-of-year wisdom has an unimpressive record of late. But as ever there are two sides to the argument, and Mr Blitz concludes his piece by coming back to where he started -- that is to say, Donald Trump. If we are to see a dollar rally, as is perfectly feasible, according to Mr Blitz it will be despite the new president, and not because of him .