Taxes, Trade and More in a Trump Presidency
Lead — As President-elect Donald Trump assumes office, the fiscal landscape is poised for significant changes, particularly in corporate taxation and Federal Reserve leadership, which may influence market dynamics. Per the full note from Goldman Sachs, analysts are closely monitoring these developments, given the potential for policy shifts that could favor corporate interests over individual tax cuts. This comes amidst discussions of Trump’s possible unilateral actions without Congressional endorsement, heightening the urgency for market participants to adjust their strategies accordingly before formal policies take shape. As the market digests these indicators, the responsiveness of key currency pairs will likely serve as a reflection of investor sentiment surrounding these political maneuvers.
What the desk is arguing
The desk suggests that the emerging economic policy landscape under President Trump will likely favor corporate tax cuts more than personal tax adjustments in 2017. This premise is backed by insights from Goldman Sachs that highlight Trump's readiness to initiate changes that could stimulate corporate earnings and economic growth, potentially supporting the U.S. dollar.
Moreover, any changes in Federal Reserve leadership under Trump may influence interest rate policies, further impacting FX rates. The forthcoming policy shifts could create opportunities in the arising volatility within currency pairs as traders react to new economic directives.
Where it sits in our coverage
Our consensus target for the USD pair is set at 1.075, with a range between 1.04 and 1.12. Notably, firms such as: - jpmorgan — target 1.10 (Mar26) - bofa — target 1.04 (Mar26) indicate distinct views on the trajectory of the dollar against other currencies, illustrating the divergence in expectations.
This outlook aligns with jpmorgan, which positions itself firmly at the upper end of the consensus range, whereas bofa stands at the lower boundary, presenting a spectrum of opportunities based on evolving fiscal policies.
How other firms see it
Aligned firms like jpmorgan foresee potential strength in the corporate sector due to tax reforms, likely benefiting the USD, while bofa expresses caution, advocating for a more bearish view on the dollar's prospects in the near term.
Given this disparity, attention should also be paid to related currency pairs such as EUR/USD, as their trajectories may closely mirror the anticipated announcements from the Federal Reserve regarding interest rates in response to these fiscal changes.
What the calendar says
As no high-impact events are scheduled on the calendar in the next 30 days, immediate market movements are likely to be driven purely by developments and speculations regarding Trump's administration's policy implementation rather than scheduled economic releases.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's administration likely to prioritize corporate tax cuts over personal tax reductions.
- 02Potential shift in Federal Reserve leadership could influence monetary policy direction.
- 03Market sentiment expected to react sharply to Trump's economic policy announcements.
- 04Current consensus shows divergence in FX currency pair forecasts among major banks.
Market implications
Market participants should closely monitor USD movements, particularly around the upcoming earnings announcements and any unilateral policy changes from the Trump administration, as these will significantly affect trader positioning and sentiment, especially against the EUR/USD.
Risks to this view
Key risks to this call include unexpected resistance from Congress on tax reforms or a sudden shift in the Federal Reserve's approach to interest rates, which could destabilize the current bullish outlook for the USD and reverse expected trends.
As President-elect Donald Trump makes the transition from the campaign trail to the White House, investors will be watching carefully to determine the economic issues at the top of his agenda. Alec Phillips, Goldman Sachs Research's political economist in Washington, discusses where Trump can act on his own without Congress, why corporate tax changes are more likely than personal tax cuts in 2017, and how Trump may reshape the leadership of the Federal Reserve. This podcast was recorded on November 15, 2016.
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The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity. Copyright 2016 Goldman Sachs.
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