Trumped-Up Dollar Seen Outshining All Else Into 2017

European election risks weigh on prospects for euro.

Drivers and Limits for a Stronger U.S. Dollar

As investors look ahead to 2017, uncertainty around European politics as well as U.S. economic and monetary policies point to a year in which persistent volatility will challenge them even as global growth prospects improve.

With political risks seen keeping investors cautious on Europe, strategists agree the dollar is a buy in the new year as “Trumponomics” should boost growth, inflation and interest rates in the U.S. That’s not good news for government bonds, which are seen losing out to credit and equities in terms of returns.

Below is a compilation of fund managers’ and strategists’ views and recommendations on the main investment risks and trade opportunities in the new year:

BlackRock Inc. strategy team led by Richard Turnill:

  • U.S.-led reflation, with rising nominal growth, wages and inflation, is expected to accelerate; that would see fiscal expansion gradually replacing monetary policy as the driver of economic growth and markets around the world.
  • Preference goes to equities over fixed income, and to credit over government bonds; favor short- over long-duration bonds, and shares over bond-like equities.
  • Political and policy risks remain abundant given the uncertainty about U.S. President-elect Donald Trump’s agenda, its implementation and the timing; “French and German elections will test Europe’s cohesion amid a forest fire of populism around the world.”

Schroders Investment Management global head of multi-asset investments Johanna Kyrklund:

  • European politics could be the wild card for 2017; the asset manager is avoiding European assets at the moment.
  • Schroders raised its 2017 global GDP forecast to 2.8 percent on expectations for stimulus from the Trump administration and China, in addition to slightly better economic performance by countries such as the U.K.

JPMorgan Chase & Co. strategists including Paul Meggyesi:

  • The bank recommends buying the dollar against South Korean won via three-month non-deliverable forwards on the prospect that U.S. monetary and fiscal policies could support the greenback.
  • JPMorgan favors owning the dollar only against those currencies that would bear the brunt of any trade frictions.
  • Among other top trade recommendations for 2017, JPMorgan favors selling the euro against the Swiss franc as the common currency faces risks from multiple regional elections next year.
  • The central view for 2017 is that, unless one can reasonably see an outright majority for populists next year, these events create more volatility than a trend for the euro.
  • The bank also recommends holding a short position in the euro against the koruna in the forward market as the Czech National Bank is expected to follow the Swiss National Bank in removing its currency cap as local inflation heads toward 2 percent.

Goldman Sachs Group Inc. strategists including Francesco Garzarelli:

  • Goldman Sachs recommends a long position in the dollar against sterling and the euro as the populist shift in politics is a building theme in the markets after the Brexit vote and the U.S. elections.
  • In Europe, the Italian political fallout following the constitutional referendum and the upcoming elections in France, Germany and the Netherlands will weigh on euro; the bank is maintaining its call for the euro to fall to parity against the dollar on a 12-month horizon.

Morgan Stanley strategists including Hans Redeker:

  • Dollar strength should be front-loaded against low-yielding currencies, particularly the Japanese yen and the South Korean won.
  • Political risks will always be an undertow for euro’s valuation, although expectations of an actual euro-zone break-up is required for the currency to fall aggressively
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