USD gains are expected to be a concern for US administration - BNPP

According to the analysts at BNP Paribas, the USD has been expensive relative to their FEER long-term fair value framework since early 2015, and their forecasts suggest it will get more expensive as we move through 2017.

Key Quotes

“If our forecasts are borne out, the USD will reach levels which would likely make any US administration uncomfortable, and there is good reason to expect that the trade-focused Trump administration would be particularly unhappy.”

“The bulk of trade, tax, fiscal spending and monetary policy changes from the US we expect this year are likely to be USD positive, but we expect the administration to become increasingly vocal on FX as the USD gains, creating an important headwind to potential gains and adding to pressure on other central banks to adjust monetary policy. In recognition of this feedback mechanism, we have lowered our end-2018 forecast target for USDJPY to 130 from 135. Our China economics team has also flattened its USDCNY forecast profile in recognition of this dynamic. It now expects USDCNY to top out at 7.09 in Q4 2017, down from previously forecasting 7.40.”