Economic and Strategy Viewpoint - May 2017

Has the dollar turned? (page 2)

• President Trump has appeared to ditch the administration’s traditional strong dollar policy by complaining about the adverse impact of the currency. The dollar is strong and we find that it is dragging on US activity, suggesting that the president is right, but will a weaker dollar follow particularly when the Federal Reserve is tightening monetary policy?
• Rate hikes in the US support the currency, but the relationship with Fed tightening cycles is mixed and there is evidence that the dollar has overshot. The path is open to a weaker dollar which may be problematic for the European Central Bank and Bank of Japan, but will come as a relief to emerging markets.

UK: Snap election offers hope for a softer Brexit (page 6)

• Prime Minister Theresa May’s surprise announcement that there will be an election on 8 June has been cheered by investors, pushing sterling higher against the US dollar. The election is likely to give May a larger majority, and more power to ignore those calling for a “harder” Brexit.
• Meanwhile, the household sector is starting to feel the pinch. The savings rate has hit a record low and retail sales have fallen sharply. The economy is on the verge of slowing, making holding the election more urgent for the government.

Déjà vu in South Africa (page 11)

• Determined not to learn from past mistakes, South African President Zuma has sacked another well regarded finance minister. The resulting political noise will likely weigh on growth in an economy already struggling to generate momentum.

Views at a glance (page 14)

• A short summary of our main macro views and where we see the risks to the world economy.

The full Viewpoint is available as a pdf below.