CBA: If you think recent US dollar rally has been spectacular, you haven't seen anything yet

Photo by Mario Tama/Getty Images

If you think the 5% surge in the US dollar since the US presidential election is already an enormous move, get ready for a surprise. It’s only just beginning, with a further 10% upside still to come.

That’s the bullish view offered by Richard Grace, chief currency strategist and head of international economics at the Commonwealth Bank, who says that Donald Trump’s proposed cut to the US corporate tax rate, dropping it to just 15%, will help to fuel a sustained rally in the greenback.

“While cuts to income tax rates and infrastructure spending are helpful in generating faster US GDP growth, higher inflation, and a higher-than-currently-priced Fed funds rate, we believe the real kick higher to the USD will come from the proposed cuts to the US company tax rate, because it will generate large cross-border inflows into the US economy,” says Grace.

He says that large capital inflows from foreign investors chasing an improved returns in US stocks, along with US multinational firms repatriating profits back to the US to take advantage of a one-off 10% tax window and flat 15% company tax rate thereafter, will fuel the dollar’s gains.

“There is historical precedent that indicates both of these channels will generate a large lift in the USD,” he says.

“We anticipate some 12-to-18 months of USD strength, beginning when the Trump Administration gets its tax cuts through the Congress.”

These charts offered by Grace certainly bolster his case.

Here’s the relationship between movements in the US dollar trade-weighted index and net purchases of US stocks by foreign investors seen in the past:

And the repatriation of profits from US firms during a prior tax amnesty:

Grace expects this will persist until mid-2018 when the combination of the stronger US dollar and higher US interest rates will begin to slow the US economy which, in unison with the prospect of tighter monetary policy in other nations, “will take some steam out of the USD”.

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