Goldman Sachs economists :

• "The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply side effects," the Goldman team, led by economists Alec Phillips and Sven Jari Stehn, write. "However, other proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term."

1. A "full" enactment of Trump's campaign promises with everything from increased fiscal spending to trade restrictions included
2. A "benign scenario" in which only Trump's fiscal proposals are enacted
3. The "adverse scenario" in which trade and immigration are curbed while the Federal Reserve grows more hawkish

EUR/USD Risk: Italian Referendum Could Be Bigger For Euro To Dollar Exchange Rate Than US Presidential Elections

The EUR to USD exchange rate is set to face a huge risk event next month, namely the Italian Constitutional Referendum

2016 has seen two anti-establishment votes, Brexit and Donald Trump’s victory.

Will Italy make it three in a row?

The European markets and the Euro are extremely jittery at the prospects of the Italian Referendum going against the ruling party.

What is the Italian referendum about?

In Italy, both the houses of the Parliament have equal powers. Law making bills are often used as ping pong balls among both the houses and it takes years and sometimes even decades to arrive at an agreement.

Italian Prime Minister Matteo Renzi has proposed constitutional reforms, which, according to him will offer better governance. The new law proposes to downsize the powers of the senate and reduce their number from 315 to 100. The law will also reduce the authority of the regions.

Renzi could have gotten away if the reforms were limited to only the above changes. However, he has proposed changes to the electoral law, which makes it difficult to remove a sitting Prime Minister before his five-year term ends, which is being opposed by many.

"If the referendum doesn't pass, over the next 30 years, whoever is prime minister will … be a slave to vetoes, blackmail and bureaucracy,” warns Renzi to the voters, quotes Bloomberg.

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EUR/USD: Targeting 6-Month Down Channel

EUR/USD is trading comfortably below the multi-decade channel support (around 1.0780, monthly closing, pointed by arrow).

Only a definite break below the aforementioned channel would negate the base formation in place since March 2015 and the resumption of the overall down trend undergoing since 2008 peak. In such a scenario, the downtrend would fetch the previous lows of 1.0540/1.0465 and most importantly 1.0180/1.00, the 8-year down channel support and the 76.4% retracement of the 2000 to 2008 up move.

At this stage, long-dated indicators (here monthly RSI) continue to hold an 8-year support line (in blue) and therefore emphasize pivotal supports are near.

Short-term, EUR/USD is approaching near the lower limit of the one and a half year range represented by the trend line undergoing since March 2015 and the 6-month down channel (1.0660/1.0610)

Daily Stochastic indicator depicts oversold conditions at the approach of a multi-year floor and suggests immediate downside to be limited.

However, it will take a break past the multi-month graphical levels of 1.0810/1.0860 and the 23.6% retracement of the fall since last August for short-term rebound signals to emerge.

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What next for the Euro?

The Euro is now likely to weaken as we approach a period of uncertainty over what is happening next in the Eurozone and European area politically. With the UK having voted to leave the EU and fresh political conflicts being triggered from the UK’s Brexit vote and Donald Trump’s election investors are fearful over what could be around the corner for Europe. Fresh fears over the economic performance in the Eurozone could lead to more QE (Quantitative Easing) which would seriously hamper the strength of the Euro.

Unfortunately if buying Euros with pounds the recent improvements and the potential for further improvements are by no means guaranteed! With the pound under pressure from the outlook ahead following the implications from Brexit, investors relying on Euro weakness to close the gap on the huge swings on GBPEUR since June might end up disappointed.

The outlook on GBPEUR has been made much more pleasant for Euro buyers with political and economic event aligning to present an increased chance of some improvements in the kind of rate Euro buyers might expect. I would suggest treading with caution and there are various key events to consider in the next few weeks including the UK’s Autumn Statement and the next ECB (European Central Bank) meeting. There is also the US Interest rate decision which could cause big swings on EURUSD which will affect GBPEUR rates.

"King Dollar" May Take A Breather Until December

In the rapidly shifting, post-US-election landscape, one consistent trend has emerged: dollar strength. As the chart below shows, the US dollar index has traded higher every single day since the Donald Trump's surprise victory in the US presidential election, reaching a its highest level since March 2003.

Many traders have been able to capitalize on this trend over the last two weeks, but the most important question for investors is "where is the greenback headed next?" To answer that question, we have to look at the three interrelated factors that have driven the buck higher of late:

1) Expectations for an infrastructure spending boom under President Trump

As we noted in the immediate aftermath of the US election, President Elect Trump wasted no time outlining his goal of aggressive infrastructure spending. Many economists believe that fiscal stimulus (read: government spending and tax cuts) has been the "missing piece" in the global growth puzzle, and based on the initial market reaction, investors agree.

At this early stage though, there are more questions than answers about Trump's fiscal policy: How big would the hypothetical infrastructure spending package be? How far will taxes be cut? Will Republican deficit hawks in Congress agree to increase the deficit? Many of these answers will be fleshed out in the coming weeks and months, but there's at least a chance that the US dollar has gotten ahead of itself by pricing in the ideal scenario.

2) A more aggressive path of projected rate hikes from the Federal Reserve

Partially as a result of the expectations for a more stimulatory fiscal policy, investors now expect the Federal Reserve to raise interest rates more aggressively. Just yesterday, Fed Chair Yellen seemingly supported this notion, opining that a rate hike could come "relatively soon." For those not used to parsing Fedspeak, this is about as close to a green light as the notoriously milquetoast Yellen would ever give.

Before the election, markets were pricing in about a 65% chance of a rate hike in December; the market-implied probability has now spiked up above 90%! Indeed, the more important question heading into next month's meeting won't be "will the Fed raise interest rates?" but rather "How many rate hikes are likely in 2017?"This theme has the potential to propel the US dollar higher throughout 2017, but just like the optimism surrounding Trump's fiscal policy, we may not get any significant "news" on this front for the next couple weeks.

3) The rise of populist/nationalist sentiment shifting over to Europe

The final factor propelling the US dollar index is the notion that the anti-establishment sentiment that led to the UK's Brexit vote and Donald Trump's surprise ascension to the US presidency will strike Europe next. The euro represents the majority of the dollar index and European countries face a number of political hurdles in the coming months.

The next flashpoint to watch will be in Italy, where citizens will head to the polls in December 4th to decide whether to reform the country's constitution. Italy's PM, Matteo Renzi, has promised to step down if the referendum is rejected, and current opinion polls are leaning toward a "no" vote. Another loss for the global political establishment here would create more uncertainty for euro traders heading into 2017. It's worth noting that there is a blackout period for publishing opinion polls on the Italian referendum start this weekend, so traders will be in the dark for until the votes are counted in two weeks' time.

Summing up these three factors, there is certainly potential for the dollar to rally further in the coming months. However, investors likely won't get any "new information" on Trump's policies, the Fed's plans or sentiment in Europe for the next couple of weeks. Given that the dollar is well within overbought territory on a short-term basis and the US Thanksgiving holiday upcoming next week, we wouldn't be surprised to see the US dollar pull back over the latter half of the November before the longer-term bullish trend can reassert itself.

Needless to say, we'll be looking for opportunities to take advantage of any short-term dips in the dollar in the coming weeks.

Euro to Dollar Outlook: Test of 1.05 EUR/USD is a 'Distinct Possibility'

The EUR/USD exchange rate may fall even more deeply in the week ahead as the strong downtrend extends on fears of political instability in Europe.

EUR/USD is in a steep downtrend and although some analysts now see it as oversold and in need of a bounce – even if it is just temporary – most agree the longer-term outlook is bearish.

The possibility of political instability breaking down the institutions of the European Union is the major risk factor pulling the Euro lower.

A series of impending elections in Italy, Austria, France and the Netherlands threaten to vote in anti-EU populist, nationalist, right-leaning governments who want nothing to do with Brussels.

This could lead to the European project slowly imploding or at least shrinking to a new core.

This, in turn, would hit the authority of the Euro and weaken it.

After hitting a low for the week at USD 1.0569, the Euro has managed to stabilise somewhat and is currently trading back in the neighbourhood of 1.06.

EUR/USD has been in a downtrend since the US presidential election, and the short-term bearish trend is likely to extend.

The MACD indicator is below the zero-line indicating more downside is probable.

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ANZ says stay bearish EUR/USD, but reasons to be cautious on targets

The dollar's appreciating trend has intensified as the anticipated policy dynamics of an expansionary fiscal stance and higher interest rates under a Trump presidency have proved to be a powerful dynamic for the currency. DXY is now at its strongest level since Q1 2003 and market expectations are growing that the dollar may rise materially further over the medium term as fiscal expansion is overlaid on an economy operating at or very close to full employment. The sharp rise in bond yields has also assisted dollar strength.

That said, we are cautious about getting caught up in the whirlwind and revising up our dollar forecasts higher just now based on anticipated US economic policy.

We anticipated a move into a 1.00-1.05 range for EUR/USD next year, as whoever was elected president would pursue a more expansionary agenda. That view still remains the case and there are a number of reasons why we are hesitant to revise up our forecasts.

Based on the DXY, the dollar is at its highest level since 2003. But it is interesting that in 2003 the dollar was in a pronounced depreciation phase amid (then) President Bush's policy agenda of steel tariffs (2002) and tax cuts, whilst inflation was also rising. Currently, US inflation is rising and the US Presidentelect's indicated policy priorities of renegotiating trade arrangements, threatening higher tariffs, and cutting taxes is having exactly the opposite effect on the USD. At present, various PPP estimates, ranging from producer prices to the Big Mac index, imply the euro is around 20% undervalued versus USD.

ANZ targets EUR/USD at 1.07, 1.06, and at 1.04 by the end of Q4 '16, Q1 '17, and Q2 '17 respectively.

Sterling outperformance likely near an end says Westpac

The latest from Sean Callow, senior currency strategist at Westpac

• European politics will start to draw increased market attention
• In December the UK government will appeal the ruling that Brexit needs to be voted on in Parliament - renewed debate is unlikely to support UK confidence

• But with key commodity prices holding higher for longer, the RBA firmly on hold into 2017 and the rise in US yields arguably excessive, AUD/USD should become more stable in the weeks ahead

US Dollar Forecast Higher

The Dollar recently reached a 13-year high versus a host of major currencies and studies suggest more upside could be on the horizon.

The Dollar Index (DXY) - a measure of overall Dollar performance against a basket of currencies - has broken out of a significant consolidation range which has been developing since spring 2015.

The Index has just nudged above the range highs, reaching a new 13-year high at 100.33.

“Dollar bulls remain in control,” says Kathy Lien, Director at BK Asset Management in New York, dips in the greenback have been shallow.”

Lien notes that U.S. Treasury yields have pulled back but not by much and more importantly, yield spreads continue to favour the dollar.  

“For example while 10 year Treasuries dropped 1bp on Tuesday November, 22, German bund rates fell 5bp pushing the German - US Treasury yield spread to a fresh 16 year low.  U.K. gilt yields also tumbled, dragging GBP/USD lower,” says Lien.

How high can the Dollar go then?

There is now a strong case for seeing a move higher equal to the height of the range (see ‘x’ on the chart below).

This would take the pair to roughly 108.50.

A more conservative estimate at 105.00 is supplied by analyst Bill McNamara of broker Charles Stanley.

“The result is that the trade-weighted dollar has pushed through the upper end of a range that has been in place since March 2015, when it peaked at 100.33, and the chart is now implying that there is scope for further upside in the short-to-medium term, with 105 or so as the next target,” says analyst Bill McNamara of broker Charles Stanley.

The largest constituent part of the Dollar index is the EUR/USD, therefore for the DXY to extend higher there would presumably need to be further losses on EUR/USD.

However, the pair is looking heavily oversold on the daily charts and we anticipate some near-term consolidation which suggests Dollar bulls may have to wait before the Greenback extends notably higher.

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USD/JPY: Buy Dips; EUR/USD: Brief Short-Covering

USD/JPY will follow US real yields as long as Japanese ones don’t rise faster and as long as global risk sentiment holds up – which really means as long as equity markets don’t go into reverse. The FT tells me that this is the 112th consecutive rise in the TOPIX, the best run since June 2015, the third 11-day rise in the last three decades and the tenth since 1949.

Maybe the rarity of bull runs of this length makes a correection in both equities and FX more likely than not at some poiint soon but at the very least, USD/JPY is a buy on dips in the invironment. Our target is 120 next year, but our 114 forecsat for March could be reached a week after we revised it. If this move continues at the recent pace the whole 2017 USD rally might have been done by the time 2017 even begins.

The Euro’s indulging in a bit of early Black Friday short-covering, and I suppose it can benefit from quiet, thin markets. I’ll be watching BTPs though. The 10year spread has widened over 50bp since mid-August when Bund yields were negative, yield-chasers were in full flow and EUR/USD was testing 1.14. The Fillon/Juppe vote-off this weekend and the Italian referendum next weekend hang over the market and it’s hard to imagine we can see much more than a brief short covering move.

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