By Michael O’Neill, Agility FX Senior Analyst
He didn’t have a chance. That’s what the pollsters and media said about Donald Trump’s campaign for the presidency of the United States. Those same pollsters and media also said, the Brexit camp didn’t have a chance when the United Kingdom voted to exit the European Union. They were even skeptical about the Chicago Cubs chances of winning the World Series even though they owned the best record in baseball at the end of the regular season.
Once again, they were wrong. Donald J. Trump is the 45th President of the United States.
The shocking news was like a global earthquake and the aftershocks rippled throughout the currency markets. The Mexican Peso was particularly hard hit. At one point, it shed 14.5% in overnight trading.
Currency markets have a right to be nervous.
A core tenet of Mr. Trump’s trade agenda is declaring China a currency manipulator. And that’s only part of his China strategy. He said he would use every lawful presidential power to remedy trade disputes if China doesn’t stop its illegal activities including applying tariffs.
China, sitting on $3.121 trillion in reserves, will vigorously dispute the currency manipulator label. They will surely note that since May, the yuan has only declined 5%, much lower than the 8.9% drop in the value of the Canadian dollar and substantially lower than the 18% decline in the value of the British pound. If the US provokes a trade war with China, the global economy would suffer.
Global economic growth forecasts for 2017 projected only modest upticks from the sluggish 2016 pace. The Organization for Economic Cooperation and Development (OECD) said in their September 21 update that “ Global GDP growth is projected to remain flat around 3% in 2016 with only a modest improvement projected in 2017, adding “Slowing trade growth will depress productivity growth in future years. It is easy to see how a US/China trade war would exacerbate global growth concerns.
Closer to home, Mexico is in the cross-hairs. Another core tenet of Mr. Trumps election platform is a wall, specifically building an “impenetrable physical wall” on the southern border.
Berlin Wall may be used as model for Trumps Wall Photo: shutterstock
It’s hard not to see that initiative having a direct (and negative impact) on the $530 -plus billion in cross border trade. When the votes were being counted and a Trump victory looked imminent, the Mexican peso lost 14.6% of its value.
Mexico is not as well equipped to negotiate with America as is the case with China which will keep the peso on the defensive in the coming months.
The Trump victory may spell trouble for the Eurozone and the euro. The post election reaction in EURUSD was one of utter confusion. Traders couldn’t decide whether the Trump victory was good or bad for the single currency.
EURUSD soared 2.8% and then collapsed back to below where it started. European Central Bank official, Ewald Nowotny, upon learning of the US election results reportedly said,” today is not a good day for the world economy”.
There is no shortage of pundits proclaiming that Mr. Trump’s victory was the result of a wave of populism washing over the land; a collective single finger salute to the ruling elite and Wall Street. If true, Eurozone leaders and the EU aristocracy have a lot to fear.
Mr. Trump’s victory proved that the UK’s decision to leave the EU was not an anomaly. The EU is dealing with a massive migrant crisis, a belligerent Russia, a stagnant economy and fears of additional UK style rebellion among the remaining EU nations. That doesn’t bode well for the euro.
Donald Trump is not a fan of the Federal Reserve. If President Trump feels the same way, Federal Reserve Chair Janet Yellen is skating on thin ice. In September, presidential candidate Donald Trump essentially accused the Fed Chair of being a lackey of President Obama for keeping interest rates low. Fortunately, for Janet Yellen, she is Fed Chair until January 2018.
Canadian’s should be nervous. The North American Free Trade Agreement (NAFTA) has been an engine of economic growth for Canada since the deal became law on December 8, 1993. Mr. Trump’s campaign website says this about NAFTA: Tell NAFTA partners that we intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. If they don’t agree to a renegotiation, we will submit notice that the U.S. intends to withdraw from the deal.
Donald Trump’s election victory is a game changer. The problem for currency markets is no one knows what game changed. Will the euro be in demand as a safe-haven currency in the event of a China US trade war? Will the US dollar rally on favourable income tax policies that let US multi-nationals repatriate profits with favourable tax treatment? Will President Trumps economic policies spur economic growth?
Questions will be the coin of the realm in FX markets. Source: Shutterstock
These questions and more will be answered over the course of the next four years. Trump’s triumph will lead to additional after-shocks and tremors in FX markets. In the meantime, currency markets will shift their focus back to interest rate differentials and central bank policies.