Say what you like about Donald Trump, but it’s clear that he continues to have a large sway over financial markets.
And that includes the US dollar, as seen in this chart from the National Australia Bank (NAB).
It shows movements in the US dollar trade-weighted index (TWI) against the NAB’s US dollar TWI fair-value model over the past seven years.
After moving in lockstep for the vast majority of this period, an enormous gap opened up this year, leaving the US dollar undervalued by around 8% based off changes in real interest rate differentials and investor risk appetite, the two components that make up the NAB model.
So why, after such a strong relationship over the previous six years, has such an extreme gap opened up between the two this year?
According to the NAB, it largely reflects increased doubts that Donald Trump will be able to deliver on tax reform and infrastructure spending, two key catalysts that helped to propel the US dollar higher following the election of Trump late last year.
“Our confidence in full retracement of the apparent 8% USD TWI undervaluation has dwindled alongside the ever-diminishing credibility of the Trump Presidency,” the NAB says.
“We still look for a USD recovery late this year and in early 2018, but push out the expected timing and reduce the forecast magnitude.”
And, even for that to eventuate, the NAB says that Trump will have to start delivering upon his pre-election promises.
“Even for this to materialise depends on either a market reassessment of Fed policy prospects and/or the restoration of some semblance of order to the White House to the point where tangible progress on tax reform and other elements of the Trump policy agenda can become evident,” it says.
“Progress on the latter currently seems a much bigger ask than the former.”