Trump and the cycle

US President-elect Trump dominates the fourth quarter. His electionhas steepened the Treasury curve and boosted commodity prices asinvestors anticipate infrastructure stimulus.

Trump reinforces trends already visible in our forecasts. We remainoptimistic that in 2017 world trade growth will accelerate to end theyear better than at any point since 2012. Building this into ourforecasts we see 2017 GDP growth stronger than in 2016 in all AxJcountries but China, where trend growth is slowing.

As growth strengthens global liquidity will tighten. We expect theFederal Reserve to raise three times in 2017 and 10-year Treasuryyields will move quickly above 3%. The Fed is further advanced in itspolicy cycle than either AxJ central banks or the ECB and BoJ. Theonly argument against 2017 being a strong USD year is that it isalready the market consensus.

In this case we believe the consensus is correct. We expect AxJcurrencies to underperform the USD. In no Asian country does thisrepresent a source of balance sheet risk. However it will be aheadwind for asset-price performance.

Our forecast for weaker currencies includes the CNY. And a rerun ofthe “renminbi depeg” concerns of early 2016 is a risk to ourforecast. If they recur, investors should buy the dip as China is muchbetter prepared today than it was a year ago.

Inflation will be higher in 2017, propelled by a closed output gap inthe US and rising commodity prices and currency depreciation againstthe USD elsewhere. We are less optimistic on the prospect for ratecuts. Only the Philippines will see early rate increases, though moneymarket rates will edge higher in China.