What lies ahead of Trump's 100-days?
As President Trump's "First 100 Days" in White House draw to a close, markets will be watching closely as much uncertainty remains about the policy outlook in the US.
- Less risk of a significant US-induced trade war. Concerns over a very aggressive US stance on international trade have receded somewhat, in part because the US Treasury did not label China a currency manipulator, even though Citi analysts caution that it is still 'early days'.
- But selective trade measures remain likely. The US Administration has taken a number of protectionist measures recently, including countervailing duties on Canada, investigations on steel and likely aluminum industries, as well as a potential executive action notifying of the US intent to withdraw from the North American Free Trade Agreement (NAFTA). We note that such announcements could be part of a negotiating strategy to achieve a more beneficial trade arrangement for the US.
- Indeed, President Trump has indicated in recent days that he does not intend to withdraw from NAFTA "at this time", with all three parties agreeing to start renegotiation of the deal.
- The primary focus of the US administration is now on tax reform. The Trump administration released a rough framework regarding its tax-reform plan on 26 April. It is aimed at reducing the corporate tax rate to 15.0% and trimming the number of individual tax brackets to three from seven, with the top rate expected to be 35%.
- Citi analysts continue to expect Congress to pass tax reform in late 4Q17/1Q18 which is expected to have a modest positive impact on the US economy of 1-1.5pp of GDP over 2018-2021.
USD: Modest Near Term Downside
Citi analysts expect modest near term USD downside over 0-3 months followed by a bounce of 2-3% over 6-12 months.
- The USD has been broadly trading a range since early last year and Citi analysts believe this may continue. Over the short term, delayed tax reform/ fiscal stimulus and associated lower yields may see modest USD losses over 0-3 months. As US fiscal issues return to the fore later this year, the USD may gain some ground again.
- Citi analysts forecast EUR/$ at 1.10 over 0-3 months now that Macron has won the French Presidential Election. Over 6-12 months, Citi analysts see EUR returning to a 1.00-1.05 range reflecting mainly a stronger USD though a risk-off event surrounding an unexpectedly hard taper by the European Central Bank could hurt EUR too.
- Sterling gains can probably continue near term as UK political uncertainty drops with a probable significant increase in PM May's Parliamentary majority after 8 June. But Brexit negotiations are unlikely to be easier after this poll and could still hurt Sterling medium term.
- Commodities generally continue to trade poorly since mid-February and more recently geopolitical risk has increased whilst the global reflation trade has waned somewhat. As such, the risks for the CAD, AUD and NZD are skewed a little lower in the shorter term.
- EM FX is likely to weaken slightly medium term, in Citi's view. A debate on the US border adjustment tax may resurface later this year and could put downward pressure on the EM FX. Citi analysts see USD/CNY at 7.09 in 6-12 months.
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