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FX BANK FORECAST · COVERAGE
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Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
FX BANK FORECAST · COVERAGE
Aggregated year-end forecasts, scenario shifts, and curated analyst notes from 30 institutional desks. No promotion.
The desk posits that the recent legislative success with President Trump's One Big Beautiful Bill has potentially positive implications for U.S. fiscal stability, an interpretation bolstered by the slim majority held by the current administration. Per the full note from UBS, the passage of this bill just ahead of the debt ceiling deadline minimizes market uncertainty, which may benefit USD liquidity and investor sentiment. Despite previous fiscal hurdles, such legislative triumphs suggest a pathway for increased spending efficiency. As a result, traders should be alert to the effects this may have on currency pairs linked to U.S. economic performance.
The desk believes that the successful passage of One Big Beautiful Bill represents a significant step to enhance fiscal stability, thereby influencing trader sentiment towards the U.S. dollar. Per the full note from UBS, the legislation's timing was crucial, considering the looming August deadline surrounding the debt ceiling that could have complicated financial markets.
Additionally, this legislative framework offers structural investment opportunities, particularly given that failure to approve such measures could lead to heightened economic uncertainty. Kurt Reimann from UBS emphasizes the importance of deadline-driven legislative action, which directly ties to market dynamics.
Our current consensus target for the USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Our stance aligns closely with jpmorgan, which reflects a positive outlook in line with recent U.S. fiscal developments. The desk's call sits near the upper bound of the spread due to the optimistic view on legislative outcomes and potential economic boosts from increased spending.
Firms like jpmorgan and others share a bullish perspective towards USD performance, linking it to legislative successes and broader economic forecasts. Conversely, bofa presents a more cautious stance, predicting potential downward pressure on the dollar influenced by upcoming fiscal challenges.
The discussion around One Big Beautiful Bill intersects importantly with key currency pairs like EUR/USD, as the legislative successes may bolster confidence in U.S. economic metrics relative to Eurozone indicators.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
Market implications
Traders should closely monitor the USD as it approaches critical levels around 1.075, while watching for any shifts in sentiment following the legislative developments. Attention should also be given to the bond market as this bill may shift yield curve expectations.
Risks to this view
Potential risks to this outlook include failure to address the upcoming debt ceiling effectively or significant opposition resulting in stalled legislative progress, which could reverse recent gains in USD sentiment.
Hi everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
For today, we are continuing with our monthly POTUS 47 conversation. Today's update will coincide with the July 3rd updates from the UBS Chief Investment Office on the POTUS 47 site, ubs.com forward slash POTUS 47. Among topics that we will be covering today, one big beautiful bill, a trade development, so a lot to catch up on.
With that, joining us for the conversation, glad to welcome back from the UBS Chief Investment Office, Kurt Reimann, Head of Fixed Income Americas. Kurt, welcome back. Hope you enjoyed the 4th of July holiday weekend.
A lot to catch up on, so glad you're here on this Monday morning. Welcome back. Thanks, Dan.
Yeah, likewise, and hope you had a good 4th as well. Thank you, Kurt. So, as mentioned, heading into the weekend, we did have some reprieve on the legislative front.
We did see on July 4th, one big beautiful bill was signed into law by President Trump. There was a ceremony at the White House, and this did meet his self-imposed deadline, having the bill signed into law by July 4th. Of course, you look at the legislation, a lot of complexity, a lot of scale associated with this bill.
So, what are some notable takeaways for investors? Right, well, this was a nail-biter all the way through. They took a gamble, it paid off, going for the one big beautiful bill as opposed to doing separate reconciliation bills, which was another strategy that they had floated early on.
They had a three-seat majority in both, or could lose three seats, in other words, in the Senate and the House, and still get this across the line. That's a pretty thin margin of error. But the other option, if you want to think about what were the motivating forces, deadlines are important.
If they didn't hit this deadline, the next deadline was the debt ceiling. Sometime in August, and that's just trickier, because if it falls apart, then the Republicans would have had to be negotiating with Democrats to lift the debt limit. They didn't want to do that.
So, it succeeded. And so, what are some of the main takeaways? Well, I think first off is we have sustained high deficits.
This bill does lower outright spending, but it lowers taxes even more. And that's the net result. Now, there's a question as to whether or not the lower tax rates will yield better economic activity.
So, when you think about the debt to GDP ratio, if it supports growth, then maybe it's not quite as detrimental to the fiscal outlook. But if you compare to a current law baseline, this is higher deficits over the forecast window over the next decade. And there's some question as to whether tariff revenue could help to offset that.
But we are staring at a larger hole between revenues and spending. The tax cuts, they were made permanent in many cases for individuals and corporations. The new tax cuts for TIP over time and old age income over 65, that is not permanent, but it's new and could be made permanent by a future Congress.
That seems anyway to be the trend. We have some spending increases or key priorities for defense, for the border wall, for immigration. And those were priorities that were in campaign promises that the president made.
So, that's a huge legislative achievement. And in order to fund these tax cuts and increase spending, there were cuts in areas related to, as we all know, roughly a trillion on Medicaid, a larger than expected cut to the clean energy, renewable energy features of the Inflation Reduction Act, and some others. So, there's a lot wrapped in here.
I think also importantly, what wasn't in there, Section 899, that was a concern for a lot of our international clients worried about the impact of investing in the US, especially if it was in companies that were in these sort of tax jurisdictions that the president had some grievances with. So, this is an expansive reshaping of the federal government. It does reduce tax rates that is at least perceived in the first year or so as being mildly stimulus to the economy.
That's supportive for equities. But it's probably mostly baked in at this point because everybody pretty well saw this coming. A lot of concern about the back end of the yield curve.
I wouldn't disagree with that, Dan. As I think about where yields are, sort of at the lower end of our range, there could be some risk. We've been favoring the intermediate or the belly of the curve as opposed to going out the yield curve.
And then I think importantly, the dollar has been in a downdraft. We have an unattractive view longer term on the dollar. I think some of these fiscal concerns will keep international investors maybe not rethinking, but just maybe reappraising their treasury holdings, especially in light of the fact that we've got higher yields in a lot of places outside the U.S.
So, you know, the competition, if you will, is better. But those are some of the thoughts there, at least on the investment takeaways from the bill and some of the key features. Well, there is, of course, a lot to digest.
So, that was a very helpful overview, Kurt. And thank you for hitting on those notable investment implications. So, if we continue with Congress with one big, beautiful bill now in the rearview mirror, what might be some other notable legislative priorities of Congress as we look ahead?
Well, as you know from our first 100 days report that we have on our BOTUS 47 site, and it's also widely discussed, the legislative activity has been quite suppressed because all of the energy and attention on Capitol Hill and, you know, you could even argue within the White House was focused on getting this bill across the line. So, there wasn't a whole lot of airspace left for thinking about other things that, you know, there's like the legislative wish list and there's the needs, you know, the legislative needs that have to get done. And it's been governing more by executive order than through laws.
And so, this is really the first piece and it's the signature economic policy of the president. But now, it really gets more into, you know, sort of business as usual legislation. And it's important because one of the pieces that would have been much further along by now had all the oxygen in the room not been sucked up by the one big beautiful bill would be the appropriations process.
Meaning that by September 30th, there has to be, you know, enough funding bills that are ready to go so that the government can stay open. And that's where they're going to ship their attention. And the budget process is different from reconciliation.
Reconciliation is one where the Senate doesn't have to get every, you know, get all 60 on board to get legislation across the line to avoid a filibuster. Reconciliation just needs the 50 plus one. With appropriations, this is where we're going to see more of the fireworks between Democrats and Republicans potentially be significant.
The fireworks that were there before really weren't because if the Republicans could corral enough votes, they'd get their wish list across. With appropriations, with government funding, there's going to have to be more horse trading, more compromise. And, you know, so everybody wants to have the government open.
Nobody wants to be holding the responsibility for shutting the government down. But the appropriations process is very much behind schedule. And they need to work quickly to get this through, you know, through the various committees, getting the markups and then getting this to the, you know, across the finish line.
So that's, I think, what we're going to be seeing between now and September 30th. Yeah, there's a lot there. I'm sure, Kurt, we will cover those efforts on future conversations, but a lot lies ahead for Congress.
Outside of congressional activities, there have been a lot of developments, chatter recently surrounding U.S. trade policy, as we're recording here today, Monday, July 7th. Just a couple of days time from now, July 9th, does mark a key deadline on the trade front. So what's been going on and what's at stake in just a couple of days time?
We're going to see these deadlines pushed out. I think that's, you know, one of the most important options that the administration has right now. And they've already hinted at it with the shifting of the goalposts from July 9th to what seems like August 1st.
A few deals will be announced. We've heard from the, we've gotten one from the UK, one from Vietnam. So the deals, those can come through.
It's hard to know which countries the U.S. will announce deals with, deals with. And they may still be in the embryonic phase and needing still quite some other, you know, the details to be hammered out. But I think it's interesting to look at the UK and Vietnam because there's such polar opposites, the UK being a country that imports more from the U.S. than it exports.
You know, so one of those rare, you know, unicorns in the world where the U.S. actually runs a trade surplus. So, you know, the UK got off with a 10% baseline and some commitments to purchase U.S. products and a lighter touch on aluminum and auto quotas. Whereas Vietnam, they run a big growing trade surplus with the United States, exporting increasingly far more than they import and have been accused of allowing Chinese products to go through their borders to avoid tariffs on their way to the U.S.
So that's why we got the 20% baseline, double what the UK got, and a 40% trans-shipment tariff. Wasn't, you know, specifically labeled China, probably for diplomatic reasons, but that's where, you know, that's what the focus is. So we'll get deals, but the deals will land somewhere in between depending upon how large the trade surplus this country may have with the U.S. and whether or not there's goods that are being routed through a country as a conduit to avoid tariffs.
So we have to be mindful that there's some differences here. And then we could see some of these reciprocal tariffs get slapped on where talks have hit an impasse, where they've hit a snag, and they're just not progressing. So there's really three options, extension, announce a deal, or we get reciprocal tariffs put back on.
I think all of these are open. The president wanted to keep optionality. He has that option.
We do think that at the end of the year, we will have tariffs about at the level where they are now, which is an effective rate of around 15%. The reason is, is that there's going to be forces pushing up on the effective rate, and that could be the product tariffs on pharma or semi or light duty trucks. There's other investigations in lumber, copper, the whole list.
But at the same time, the tariffs are, at least the IEPA tariffs, are under judicial review. They're under appeal. The Court of International Trade declared them illegal.
It'll probably go all the way to the Supreme Court. We may not know the appeals decision until the end of this year, early next year. We do think that they'll be declared illegal, in which case the government's going to have to pay out to plaintiff's damages.
So that takes down pretty substantially the collected tariff revenue, because it gets redistributed again. So anyway, these are the forces, I think, that will be shaping tariff policy between now and year end. There will be headline risk.
As to the extent that the markets are going to react to it the way that they did back in April and May, I think it's going to have an increasingly more diminished effect on markets. And the scope for the administration to radically ramp up tariffs is more limited now, because of the deficits. I'm not saying that the president is going to be focused on deficits and setting trade policy.
That's not the point. The issue is, is that if they destroy the import and the economic activity through tariffs, then they make the deficit problem even worse. And there's going to be that kind of, you know, kind of push and pull within the administration, I think, ultimately will restrain.
But it's still aggressive. You know, this is still higher tariffs than anything we've seen in decades and six times where we were at the beginning of the year. Well, Kurt, it is interesting to consider the amount of variables involved in shaping these trade deals.
And as you pointed out, the deadlines do remain fluid. We, of course, recall how markets had responded to initial talk of tariffs by the administration earlier this year in April. As we move ahead, how does CIO expect trade developments to evolve from here?
And what might be the market implications? How will investors be monitoring this all? Yeah, I think there's three, you know, getting back to kind of the core asset classes, what matters most there?
These sectoral tariffs are not well understood. And there's a there's a lot of, you know, cloud cover over what form they will take, how large they will be, which countries will be targeted. It makes it very hard for investors to incorporate that into any analysis.
And so it may be that they, you know, do the analysis equivalent of pulling the covers up over their head and saying, you know, this is too complicated. And then when they get announced, it could have a material impact. So we've got to be just alert to the fact that these sectoral tariffs, these have been mostly exempted.
The investigations have run their course. They may appear in the third or fourth quarter. And the scope and magnitude at this point is unknown.
So that's a risk. The overall equity market, you know, I think it's been, you know, it's been processing each individual presidential announcement about tariffs with less volatility over time. And that's true of all wars that there tends to be a decay on the news impact on the markets.
And I think that's also something that we can look to as to why are we, you know, sort of back trading near the highs again. Each incremental piece of information that we get from the administration, whether investors believe it's going to ultimately be policy or not, I think there's some, you know, still some question about that. The fixed income markets, you know, bond yields, as I said before, you know, they moved lower over the course of the past month, provided pretty decent tailwind coming into the end of the first half.
We don't need to take on additional interest rate risk. We get a lot of the yield, call it 90% of the yield in a five year. So it's not necessary to go out the back end of the yield curve.
But we should imagine that tariffs eventually start feeding through into inflation. They haven't yet. When will they?
They will feed into inflation when the inventory build and the import build gets worked off and the new products that people are buying that incorporate the tariff, have that price included, and that'll lift the price level. And that could pose some risk to the back end. And I think, you know, really importantly, the, you know, getting back to the dollar and thinking about that.
And gold is a diversifier. You know, thinking about diversifying your currency holdings, you know, other currencies, if the dollar is weakening, can be supportive to total returns. And gold can help to diversify the portfolio at times of geopolitical and broader political uncertainty.
It's been a really strong performer in portfolios this year. And we think there's still some upside left. So think about that as a way to build in, you know, some hedge to the extent that tariff news does start to become a bit more unsettling in the second half.
Kurt, that was a great point to end on. Hitting on that positioning guidance as a lot lies ahead with respect to these trade developments. And we do know that at times could contribute to market volatility.
So it's helpful to know how to think about preparing accordingly. But Kurt, this was great. Always enjoy these monthly catch ups and do look forward to picking back up with our POTUS 47 conversation in August.
Thanks very much, Dan. Likewise. Thank you, Kurt.
And again, today we have been joined by Head of Fixed Income for the Americas with the UBS Chief Investment Office, Kurt Reimann. Again, I want to point you, our listeners, our clients, to the latest POTUS 47 series of updates available for you now on the website, UBS.com forward slash POTUS 47. From UBS Studios, I'm Dan Cassidy.
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