US: New Trump tactics to help USD and rates? - BBH

In the face of much cynicism and pessimism about the outlook for the Trump Administration's agenda, the most important shift since last November's election has taken place recently, according to analysts at BBH.  

Key Quotes

“After increasing frustrations with Republican legislators, who despite their majority, have ideological differences that have stymied the Administration's agenda, Trump has switched gears.  He is seeking, at least in some areas, to work with the Democrats, with the hopes of peeling off enough Republicans to forge a majority.  This has worked to buy more time, insofar as the debt limit and spending authorization were extended until mid-December to ensure smooth emergency aid funding after the recent weather calamities.”

“It looks like this new course can be extended in a few issue-specific areas, including DACA and possibly health care and tax reform.   It may be premature to reach any hard and fast conclusions, but the point is that the dance between the fractious and small Republican legislative majority, a maverick President, and a strident Democrat minority has changed tunes, and many investors do not appear prepared for this.”  

“Given prices, market positioning, and sense of market psychology, we think the market is ill-prepared for any one of these scenarios:  tax reform, the continuation of the Fed's gradual removal of accommodation through increasing the Fed funds target range, and Yellen being reappointed.  We suspect the first is two are more dollar bullish than the third though the reappointment of Yellen, assuming she would accept, would provide continuity at an important time for the administration.  Many in the media have emphasized the importance of loyalty for the White House, but in the Fed's case, dependability may be almost as good.  She is a known quantity, there is a nearly 40-year old tradition of two terms for the Fed chair, and her views on regulation are very much what one would expect from one of the most important regulators.”

“Tax reform is of keen interest, and the squabbling between the Freedom Caucus and the Tuesday Group warned that what happened to health care reform was going to sabotage tax reform.  A new bipartisan group has emerged (Problem Solvers) that may break the logjam.  Although details are not clear, a new timeframe has been offered.  In about two weeks (~September 25), a broad framework will be announced and this will be followed up by release of core elements that will operationalize the framework by mid-October by House Ways and Means Committee.”  

“This would leave only 28 legislative days for the remainder of the 2017 session.  The debt ceiling can be maneuvered around for a few months, but the spending authorization needs to be renewed/extended from early December, or face the risk of a shutdown of parts of the government.  Sequentially, the FY2018 budget needs to be in place to allow the parliamentary ploy that allows tax reform to pass with a simple majority.  There is a bit of a chicken-egg story, as some legislators (Freedom Caucus) are reluctant approve spending authorization without a better understanding of the tax changes.”