This has been a year of surprises, to say the least. U.S. President-elect Trump has outlined economic stimulus plans – tax cuts, infrastructure spending and deregulation – which take the pressure off of monetary policy to be super accommodative. This week, U.S. Federal Reserve Chair Janet Yellen said that the Fed expects to raise rates three times next year – more frequently than what the market expected.

The result has been a stronger dollar, with the USD index at its highest point since June 2003. We expect this to continue into 2017.

Let’s look at how that will impact the Chinese Yuan (CNY) and the Japanese Yen (JPY).

China’s leveraged businesses continue to choke its growth, resulting in a unilateral outlook for a further weakening of the CNY.  Instead of the Yuan becoming a reserve currency, as the Chinese government had hoped, the People’s Bank of China is selling dollars and buying Chinese Yuan to stop its freefall.  

Something to keep in mind: China holds the majority of U.S. Treasuries. If political tensions with the incoming administration escalate, they can choose to sell off massive amounts of those Treasuries, which would push up our long-term interest rates and possibly even choke our housing market.

Moving on to Japan, the Japanese Yen has been one of the most volatile currencies this year. Since the U.S. election, however, the Yen has lost a whopping 10 percent in value. Why? First, it was overvalued to begin with; second, there is still no sign that Japan is coming out of its deflationary economy. We believe that selling of the Yen will continue into 2017.

Higher oil prices and import price inflation, aided by a weaker Yen that helps exporters, may have the effect of strengthening Japan’s economy, so we’re not overly concerned. But if the Japanese Yen also goes into free fall, the Bank of Japan may intervene to sell dollars.

Another note here: Japan is also a large holder of U.S. Treasuries.

My View: The dollar has already strengthened against Asian currencies and it will continue to do so throughout the coming year. In 2017, we may see President-elect Trump have an easier time moving forward his fiscal stimulus policies, while his protectionist trade policies become less of a priority over the year. 

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