Longer-term it is hard to argue against further Dollar strength owing to Trump's policy card, however, short-term traders could be in for some welcome volatility.
Donald Trump will be inaugurated as the next US President on January 20 and so far the Dollar has risen strongly thanks to his manifesto that includes pro-growth fiscal policy, overseas capital repatriation policies and trade protectionism.
"The Dollar rally is being driven by enormous investor expectations that the relatively strong US economy will accelerate even further under the leadership of Donald Trump who is expected to stoke growth through fiscal stimulus and deregulation. Mr. Trump’s policies will take months to be put into effect, but in the meantime the markets will need to key off the US data. Given the very high expectations, the possibility of disappointment is high," says Boris Schlossberg at BK Asset Management in New York.
But will the rally continue?
History shows the US Dollar virtually always moves in the same direction after the inauguration of the new president on January 20.
Nordea Market’s Head of FX Strategy Martin Enlund - in a paper seen by Pound Sterling Live - has crunched the numbers and come up with some remarkable results.
GBP/USD Tends to Rise Following Inauguration
Looking at Sterling/Dollar, Enlund finds the GBP/USD tends to gain following an inauguration.
The Pound gained on 10 out of the 12 times that a president was inaugurated since 1973.
1973 was an anomaly because of the Bretton Woods agreement on currency policy while 1977 saw the Pound devalue:
Enlund lookins at the EUR/USD pair and analyses its performance after inauguration day from 1973 onwards.
The chart below shows the results:
The first thing to note is the remarkable clustering of results in the positive half of the chart compared to the negative part.
“On all presidential inaugurations since 1973, both first and second terms, EUR/USD has risen by an average of 3.6% between the yearly open and by the end of February,” says Enlund.
The dark green line shows it has only dropped once, but that was in 1973 when the Bretton Woods agreement broke the Gold Standard.
“It has only dropped once out of 12 times (in 1973, and that was in conjunction with the then-ongoing collapse of the Bretton-Woods system,” says the Nordea strategist.
Impact on USD/JPY
Next Enlund analyses the impact on USD/JPY.
He finds that it has weakened 9 out of the 12 times following inauguration, with an average fall of 0.8%, although this was distorted by the 13% rise in 1973 when Bretton Woods broke down.
The results speak for themselves.
Taking away the idiosyncratic year of the end of Bretton Woods, there is a statistically significant probability that the Dollar will depreciate after the January 20 inauguration and for the two months that follow.
Enlund suggests that either of two things will happen – the current bullish consensus will be wrong, “at least temporarily,” or that, “this time it’s different,” and Trump’s unusual policy agenda will keep the Dollar rising.