• DJT to be inaugurated on January 20th and so starts his ‘First 100 Days’

• Can he row back on China and yuan? Does he want to?

• What will stimulus plans look like?

• Homeland Investment Act MK II

• Probably the most important ‘First 100 Days’ of a Presidency since WW2

• What is the first gaffe and how does the market react?

President Trump takes the reins

Dollar nowhere close to being too strong

Source: Bloomberg

1/31/1

975

5/3/1

976

8/3/1

977

11/3/1

978

2/3/1

980

5/3/1

981

8/3/1

982

11/3/1

983

2/3/1

985

5/3/1

986

8/3/1

987

11/3/1

988

2/3/1

990

5/3/1

991

8/3/1

992

11/3/1

993

2/3/1

995

5/3/1

996

8/3/1

997

11/3/1

998

2/3/2

000

5/3/2

001

8/3/2

002

11/3/2

003

2/3/2

005

5/3/2

006

8/3/2

007

11/3/2008

2/3/2

010

5/3/2

011

8/3/2

012

11/3/2013

2/3/2

015

5/3/2

01670

80

90

100

110

120

130

140

150

160

170

Tradeweighted USD only back to 41 year average

Tradeweighted USD Average since 1975

• Swaps curves have been boosted of late but nerves sit around Trump stance

Where does the Federal Reserve sit?

2016 2017 2018 2019 Longer Term0

0.5

1

1.5

2

2.5

3

3.5

FOMC Dots Median OIS - As of Meeting Date OIS - Latest Value

Where does the Federal Reserve sit?

• Make-up of the Fed can easily change from wholesale dovish institution

• The rises in oil prices eliminate the only large depressant on inflation measures in the US. The Federal Reserve will be battling against inflation returning to target sooner rather than later, alongside a strong USD

• Will want USD to behave itself or risks of financial instability increase

Let Them Eat Chaos

• Germany – Anti-immigration AfD party performing well in recent local elections

• Greece – resumption of bailout worries following slow reform progress since beginning of 2016

• Netherlands – PVV still leading in polls but lead had slipped in past few months

• Italy – banking reform desperately needed

• France – Le Pen still riding high in first round polling. 2nd round a little more mixed

Let Them Eat Chaos

• Euro should continue to weaken in the short term

• As it stands at the moment we think that markets are overstating the longer-term political risk within Europe but near-term we see significant weakness in the single currency, especially against the USD. The referendum loss of the Italian government has caused traders to further price in populist pressures in 2017.

• For now, our estimates remain that centrist, status quo parties actually carry French and German elections with those in the Netherlands more difficult to call at the moment. We see the chances of a populist win (PVV, Front National or a Merkel loss) in the Netherlands at 50%, in France at 25% and in Germany at 20%.

• We see EURUSD breaking parity in H1

Brexit timeline heats up into the end of Q1

• For all the heat and noise from the referendum and the near 6 months that has passed since that morning in June there are few things that we are more certain of than the UK went to the ballot box. We know that Article 50 will be invoked by the end of Q1 in all likelihood and that will start the stopwatch on two years of negotiations.

• Everything else is up for debate and, more pertinently, negotiation.

• We were wrong in our assertions that the UK economy would immediately suffer as a result of the Brexit vote but the economic data remains balanced on a knife edge. Heading into 2017 it is inflation that worries us the most.

• We think that CPI could easily break 2.0% in Q1 but BOE reaction will need to be limited

Too early to call time on GBP weakness • Is sterling oversold? Absolutely. Does that mean that it cannot go any lower? Absolutely

not.

Source: Bloomberg1/3

1/1990

2/3/1

991

2/3/1

992

2/3/1

993

2/3/1

994

2/3/1

995

2/3/1

996

2/3/1

997

2/3/1

998

2/3/1

999

2/3/2

000

2/3/2

001

2/3/2

002

2/3/2

003

2/3/2

004

2/3/2

005

2/3/2

006

2/3/2

007

2/3/2

008

2/3/2

009

2/3/2

010

2/3/2

011

2/3/2

012

2/3/2

013

2/3/2

014

2/3/2

015

2/3/2

01670

75

80

85

90

95

100

105

110

Tradeweighted GBP

Too early to call time on GBP weakness

• While the pound has only been weaker on a trade-weighted basis twice since the end of Bretton Woods, the nature of Brexit and its existential risk to the UK’s position in the world and its trading relationships across the globe arguably make for a more complicated policy cocktail than anything we have seen before.

• We believe that upside to sterling will return, possibly by the end of the year, although this depends almost exclusively on an easy path of negotiations between the UK and the EU. We think it is therefore prudent to wait until the government has laid out its negotiating plan before becoming bullish on GBP.

China vs Trump• On the campaign trail Trump threatened to label China as a currency manipulator on his

first day in office. He can do this unilaterally provoking an instant 15% tariff on Chinese goods into the US for a period of 150 days. We would wager that such a measure would lead to a modicum of reprisal from Chinese authorities (sales of iPhones for example) and damage would be wrought on both economies.

• Once again we have little knowledge about Trump’s willingness to doggedly pursue these reforms once in office and risks remain that China will feel the need to meaningfully stimulate their economy via both additional fiscal spending and looser monetary policy despite concerns over their longer term effects.

• The People’s Bank of China will be, alongside the Federal Reserve, the most important central bank in 2017. The manipulation and movements of the yuan will be crucial to how well China weathers any trade or Trump driven storm. The final few months of 2016 have seen the RMB lose around 3% of its value against the US dollar. We anticipate this to continue in 2017 with a breach of 7.00 in USDCNY in Q1.

China vs Trump• A higher USD is bad for the RMB for many reasons but the key driver remains market

expectations of a collapse in the spread between US and Chinese interest rates as the Fed deals with Trump driven inflation and the Chinese keep things loose to stave off any damage to growth

12/16/2

011

2/24/2

012

5/4/2

012

7/13/2

012

9/21/2

012

11/30/2

012

2/8/2

013

4/19/2013

6/28/2

013

9/6/2

013

11/15/2

013

1/24/2

014

4/4/2

014

6/13/2

014

8/22/2

014

10/31/2

014

1/9/2

015

3/20/2015

5/29/2

015

8/7/2

015

10/16/2

015

12/25/2

015

3/4/2

016

5/13/2

016

7/22/2

016

9/30/2

016

12/9/2016

-7

-6.8

-6.6

-6.4

-6.2

-6

-5.8

-5.6

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

US yield picture pushing CNY lower

CNY/USD China 2yr - US 2yrSource: Bloomberg

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