US Fiscal Policy and USD: what’s ahead


The new president of the US took charge the past month and now the focus is actually on its economic programme that was proposed to the voters during the campaign.

One of the main points to consider is the one focusing on the taxes.

As highlighted by the ETF’s asset management house Source, Investors believe that Republican tax proposals would be dollar positive. If that were to be the case, some obvious beneficiaries would be overseas earners in markets such as the Eurozone and Japan.

The GOP (Grand Old Party) “Blueprint” covers both personal and corporate taxation. The broad aims are: to simplify the tax system and to boost economic/job growth without increasing the budget deficit. Simplification is certainly needed — a Tax Foundation estimate suggests tax compliance will have cost $409bn and 8.9bn hours of effort in 2016.

While on the personal taxation side the proposal is quite easy with the reduction of the rates brackets, from 7 to 3 (with the highest rate shifting from 39.6% to 33%), on the corporate side the taxation proposals are a bit radical.

The current system is a worldwide, origin based income tax. It is worldwide (rather than territorial) because US companies pay tax on dividends repatriated from overseas operations. It is origin based (rather than destination based) because tax is based on where goods are made, rather than on where they are consumed. It is income (rather than consumption) based because the burden of the tax falls on the producer rather than the consumer.

Much of the complexity in the changes comes from a desire to allow border-adjustments, without adopting a VAT system that a lot of countries, on the other hand, adopt.

Under the current US system, exports are taxed upon entry into a VAT country but exports from such countries are not taxed when arriving in the US (apart from import duties). Hence, the feeling that the system is loaded against the US. Of course, the simple answer would be to introduce a VAT system but there seems to be an eversion to such clarity.

So, bizarrely, under the GOP proposal the border adjustment will be made within the corporate taxation system (imports will not be included in costs and exports will not be counted as revenues).

Speaking of the rates, the GOP proposals see the corporate tax rate cut from the actual level of 35% to the proposed level of 20% with net-interest expenses that will no longer be deductible (to discourage leverage), most current deductions and credits will be eliminated and dividends remitted from overseas will not be taxed (with a one-off 8.75% tax on accumulated foreign earnings).

Based on all of the above, it is easy to see why investors believe these measures would be USD positive. If they were, we believe it would favour the exporters and overseas earners in markets such as Japan and the Eurozone (also note the recent rebound in Asian export volumes – South Korean exports were up 25% y-o-y in the first 20 days of January).

We would like to show in figure 1,how the USD is about 10% above its post-1980 norm in real trade-weighted terms. From that starting point, the USD can certainly go higher but the upside may be limited. The figure 1 itself also suggests the path of the USD will depend upon changes in the gap between US yields and those elsewhere.


Figure 1: USD and Bond Yield Gap

That yield gap will depend upon the relative performance of the US economy and the reaction of the Fed compared to that of other central banks. It was therefore interesting to see the weak US GDP data for Q4.

It was not so much that growth slipped to 1.9% from 3.5% but that, without inventories, growth would have been only 0.9%. Even more worrying for dollar bulls was that net exports knocked a whopping 1.7% off GDP during Q4. This suggests to us that the US economy is struggling with the current level of the dollar and that the Fed does not need to be too aggressive.

In this scenario, Nominal bond yields are expected to rise as the Fed raises policy interest rates. We expect the Fed to deliver all three of the rate hikes indicated in its ‘dot plot’. Although policy rates will increase by 0.75%, we believe that nominal US 10-year bond yields will increase by 0.5% by year-end (from 2.5% to 3.0%) as we typically see the yield curve flatten in rate rising environments.


Figure 2:Spread 10yrs vs. FED funds rate

With inflation remaining elevated, despite the increase in nominal yields, real yields will be low and could even decline from just under 0.5% currently. Given gold’s historic negative relationship with real rates, a rising nominal rate environment is still consistent with rising gold prices.

Cristian Rusconi



  • 08th February: MBA Mortgage Applications
  • 08th February: DOE Crude Oil Inventories
  • 09th February: Initial & Continuing Jobless Claims
  • 09th February: Bloomberg Consumer Comfort
  • 10th February: Import Price Index MoM
  • 10th February: Monthly Budget Statement
  • 14th February: NFIB small business Optimism
  • 14th February: PPI Final Demand MoM & YoY
  • 15th February: CPI MoM & YoY
  • 15th February: Retail Sales Advance MoM
  • 16th February: Initial & Continuing Jobless Claims
  • 17th February: Conference Board US Leading Index MoM
  • 21th February: Markit US Manufacturing/Services/Composite PMI
  • 22th February: Existing Home Sales
  • 23th February: Chicago FED Nat Activity Index


  • 09th February: Trade Balance SA & NSA [GER & SPA]
  • 10th February: Industrial Production SA MoM & WDA YoY [FRA & ITA]
  • 10th February: Manufacturing Production SA MoM & WDA YoY [FRA]
  • 14th February: GDP SA QoQ MoM & WDA YoY [GER & ITA]
  • 14th February: CPI MoM & YoY [GER & FRA]
  • 14th February: ZEW Survey Current Situation, Survey Expections [GER & EZ]
  • 20th February: PPI MoM & YoY [GER]
  • 21th February: Markit EZ Manufacturing/Services/Composite PMI
  • 22nd February: IFO Business Climate/Expectations/Curr. Assessment [GER]
  • 24th February: Economic/Manufacturing [ITA]
  • 24th February: Consumer Confidence Index [ITA]

DISCLAIMER: The only purpose of this document is to provide information about the current markets. This newsletter is prepared for information purposes only and should not be interpreted as investment advice. It does not constitute an offer or invitation by Framont to any person to buy or sell any security or instrument or to participate in any transaction or trading activity. It does not want to solicit the subscription of financial products and services, which must only be done after reading and understanding the Prospectus and any other related information. Framont & Partners Management Ltd verified very carefully the information contained in this document, but it does not ensure that such information is complete and correct and is not responsible either about the use that third parties make of such information or about any los s or damage that may arise after that use. Information included in this newsletter is considered as current as at the date of publication , without regard to the date on which you may read or be provided with such information. We do not accept any liability arising from any inaccuracy or omission in the information on this website. Every investor should always read the Prospectus and any other available information before making an investment decision. Furthermore, the yield or other terminology used to indicate the return is not guaranteed and may go down as well as up. The performance figures quoted (if any) refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. An investment product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. More details about Framont are available on the website