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Chart 11: Dollar strength leads to immediate trade drag (inverse relationship) Chart 12: Expected path of fed hiking cycle (bp) HES Contribution of net exports to real GDP (Ihs, pp) 200 ——— Current market pricin 180 pring 45 =——=Real trade weighted USD, QoQ (rhs, % yoy) a 160 == Median dot, Sep-16 SEP ° 140 ——BofAML forecast 1.0 Ae% 120 05 100 - 80 0.0 60 40 0.5 0% 50 -1.0 0 45 2% 0 4 8 12 16 20 24 , # of meetings into tightening cycle -2.0 4% Q2-2013 Q1-2014. 94-2014 = Q3-2015 — Q2-2016 Source: Federal Reserve Board, Bureau of Economic Analysis Source: BofA Merrill Lynch Global Research, Federal Reserve, Bloomberg Nevertheless it is not our central scenario in part because there is a risk that much of a Trump surge could be bad for growth. As we noted above the fiscal stimulus is likely to be back loaded as far as 2017 is concerned. In the meantime the FX and Rates teams predict an 8-10% appreciation of the USD from pre-election levels and 10Y rates about 80bp higher. Our economists note that a 10% appreciation of the USD is estimated to slice around 0.5% off of US GDP growth over two years. Higher mortgage rates from higher bond yields would also likely dampen growth. As a result, they have actually lowered their forecast for US growth in the first half of next year to around 1.5% before seeing it rebound to around 2.3% in H2 and then 2.5% in 2018 as the fiscal stimulus feeds through. Various Fed members, notably Bill Dudley of the NY Fed, have said this year that a stronger USD would have an impact on monetary policy. So to some extent we see USD strength as self-limiting as it would start to lower the profile of likely Fed tightening. Our economists are also cautious as to the extent of the impact of the Trump fiscal plans. Assuming that there is a compromise between the Trump administration and Congress our economists think the likely scale of tax cuts is $2-3tn over 10 years, with $200-300bn of this in 2017. Given the low estimated multiplier from any proposed tax cuts and a Congress likely to limit the amount of an increase in government spending, they look for a modest 0.5% boost to growth. Upside risk to growth and rates if Trump does more on fiscal, less on trade If Congress passes more of the Trump stimulus plan, particularly on the infrastructure side, and there are no significant changes to trade or immigration policies then our US economists think growth could potentially hit 3% in 2017 and 3.5% in 2018. That would likely be accompanied by a faster pace of Fed hikes than they currently assume (which is two hikes between now and end 2017 followed by 3 in 2018). Trade policy and its impact vital The other key factor of the new administration is going to be the direction on trade. President elect Trump has already said he will pull out of the TPP, TTIP looks likely to get the same treatment, while NAFTA is set to be renegotiated. Meantime Trump said he will label China a currency manipulator. This is the other side of the Peak Globalisation/Peak Inequality coin and none of it looks good for global trade. Combined with the stronger USD and higher rates, it is easy to understand the knee jerk reaction of investors to sell EM asset, particularly given the gains of earlier this year. Bankof America Merrill Lynch Global Cross Asset Strategy - Year Ahead | 30 November 2016 9 HOUSE_OVERSIGHT_014440