Donald Trump will be a 'game changer' for currency markets, says the CBA

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Many people are bullish towards the US dollar right now, one only has to look at the price action since Donald Trump won the US presidential election as evidence.

However, not all US dollar bulls are created equal.

Richard Grace, the Commonwealth Bank’s chief currency strategist, is one analyst who is more bullish than most.

After correctly calling the “Trump-led” US dollar rally months before it occurred, his optimism towards the greenback went up a cog this week, predicting that it will rally by an additional 10% over the next 12 to 18 months, on top of the 5% gain that’s already been seen.

His view is based on the premise that large capital inflows from foreign investors chasing an improved return 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 said. “We anticipate some 12-to-18 months of USD strength, beginning when the Trump Administration gets its tax cuts through the Congress.”

It’s a punchy call, no doubt about it, but one that’s not unprecedented given similar events in the past.

So if the US dollar is going rip higher for at least the next year, what will that mean for other major currencies over the same period?

Grace, along with his team comprising Joseph Capurso and Elias Haddad, has that answer covered, releasing updated forecasts for a swag of major currency pairs on Friday.

In short, other major currencies are going to be under the pump in their opinion.

Here they are:

The euro below parity, the British pound not far above, the Aussie dollar below 70 cents and the Chinese yuan and Japanese yen at fresh multi-year lows.

That’s just some of the massive moves the trio expects will occur against the US dollar within 18 months.

Twenty big figures in the GDP/USD, 11 in the EUR/USD and 10 in the USD/JPY, among others. Occurring in unison, that’s the kind of moves that have not been seen since the global financial crisis.

“In September, a Trump victory was a ‘risk scenario’ to our forecasts, but it is now a central scenario driving our forecasts,” the trio wrote on Friday. “In other words, the Trump Administration is a game changer.”

The main risk to these forecasts, says Grace, Capurso and Haddad, would be if Trump does not reduce the US company tax rate to 15% as pledged.

“Then the USD will not strengthen much more from current levels, and our forecasts will need changing,” they say. “However, our central scenario is the cut to the company tax rate is passed by the Congress, and the USD lifts over the following fifteen months.”

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