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Outlook 2017

The U.S. Dollar: The Bull/Bear Counterpoint

(Kitco News) - Just like the bulls who storm through the streets of Pamplona Spain each summer knocking down anything in their path – U.S. dollar bulls have relentlessly knocked down and pressured commodity prices including gold in recent months.

What lies ahead for the mighty greenback in 2017?  Gazing into the crystal ball –here are a few forecasts and predictions.

The Dollar Index: A Bullish and Bearish View

The Bull View: There’s a reasonable chance that the U.S. dollar index could climb by another 5%, or to the 108 level by mid-year 2017, says Henry To, CFA, chief investment officer at CB Capital Partners, Inc. in Dallas, Texas.

Why? "Bullish sentiment in the U.S. dollar index in the futures market is at its highest level in a year, but it is not yet at very extreme levels. This means there’s potential for the U.S. dollar to rise by another 5% due to the combination of momentum and as the markets price in three instead of two Fed rate hikes in 2017," To says.

The Bear View: "I am neutral to moderately bearish for the U.S. dollar in 2017," says Colin Cieszynski, chief market strategist at CMC Markets." I’m thinking the Dollar index could hit 105 sometime in the first half but I think by mid-year it may be clear that the Fed is less likely to be as aggressive as the street is thinking in the last full year of Janet Yellen’s term and that the Dollar index could be trading back near 97 or 98."

Why? "I think that the recent rally could sow the seeds for a correction in the Dollar in 2017. The higher dollar and hawkish Fed coming at a time when other economies around the world are struggling and expectations of several interest rate increases could undermine the economy and the Dollar going forward," Cieszynski says.

What Could Derail The Dollar Bull?

"Not only have U.S. Dollar traders put the cart before the horse, it’s in the next county already. If things don’t go as the street is hoping, the U.S. Dollar rally could go off the rails," Cieszynski says.

  1. Blame it on the Fed: As at the start of 2016, the biggest risk to the Dollar is that the Fed ends up not increasing interest rates as much as the street is expecting, Cieszynski says.

  2. "At the end of 2015, the Fed dot plot was forecasting four interest rate increases for 2016, instead we had one. At the end of 2016, the Fed dot plot is forecasting three interest rate increases for 2017 while the U.S. Dollar is higher than it was a year ago and is pricing in 4-5 rate increases in 2017," Cieszynski says.

  3. Oil Prices: The one major factor that could derail the U.S. dollar index bull rally phase is oil prices, warns To.

  4. "Historically, higher oil prices have driven declines in the U.S. dollar index, and vice-versa. The relationship isn’t entirely clear but it seems like movements in oil prices have preceded and caused subsequent changes in the U.S. dollar index," To says.

    Here's the rub:  "If global oil consumption continues to strengthen—and given the expected ongoing decline in U.S. shale oil production in 2017—this will lead to higher oil prices next year, and in turn put pressure on the U.S. dollar index.

  5. Tax Cut Impact Not Immediate. The promised corporate and personal income tax cuts by the Republicans are not expected to be effective until the year 2018, To says.

  6. "This means if the U.S. economy slows down in 2017, the Fed will need to tone down its hawkishness (similar to its policy in the first half of 2016), which in turn will also put pressure on the U.S. dollar index," To explains.

Big picture: A potential source of problems for the Dollar is that the negative impact of the higher dollar on U.S. exports, travel and USD earnings of U.S. multinationals is likely to hit relatively quickly and could impact corporate guidance as early as mid-January, Cieszynski says.

What Could Keep The U.S. Dollar Index Rally Going?

"Potential drivers for more dollar gains could be a strong U.S. economy, rising inflation from higher energy prices and higher infrastructure spending and flight to safety flows should we see more uncertainty abroad could all combine to support the U.S. Dollar in the coming year," Cieszynski says.

Fed Rate Hikes: A pace of stronger-than-expected interest rate hikes could support continued gains in the U.S. dollar index.

Inflation: Higher-than-expected U.S. inflation could also cause further hawkishness within the Fed, driving up expectations for more rate hikes and a higher U.S. dollar index, To says.

To points to an example. "President-elect Trump’s new appointment, Dr. Peter Navarro - head of the newly-created National Trade Council. Dr. Navarro is likely to take a hardline against China with regards to intellectual property rights, environmental regulations within their manufacturing sector, labor laws, and so forth. Alongside President-elect Trump’s plans to impose tariffs and other penalties for U.S. companies that offshore their manufacturing, this will shift market expectations for a lower U.S. trade deficit in the long-run, and thus further supporting the rise of the U.S. dollar index," To says.

Watch For the Black Swans

Europe: Black Swan events overseas that could impact the Dollar include election wins by Euro skeptics in the Netherlands, France and especially Germany, any kind of unravelling in Greece or Italy, Cieszynski says. "Really, anything that undermines the Euro and raises the risk that the currency union could fall apart. While there will be a lot of noise around Brexit that won’t come to a head until late 2018. "

Close to Home: Bearish events for the Dollar could be any setbacks toward Donald Trump’s spending plan, Cieszynski says. "Fed meetings particularly the March and June meetings could have a significant impact on the dollar especially if the Fed passes on raising rates at one of these meetings. It needs to raise at March, June, September and December to hit four increases."

U.S. Recession: A true Black Swan event would be a U.S. recession, likely precipitated by a disruption of the supply chains for U.S. Fortune 1000 companies and a trade war with China, To says.

By Kira Brecht, Kitco.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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