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.
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|