Key Points:
- Trump election volatility likely to smooth out in coming days.
- Medium term USD gains are probable.
- Protectionist trade policies from Trump unlikely to come to fruition.
The past 24 hours have proved an entertaining, and at times disturbing, display of the U.S. Democratic process as the Electoral College resoundingly came up Trumps. However, global financial markets have reacted relatively violently during the process and exhibited levels of volatility not seen since the Brexit referendum. Subsequently, let’s take a look at what has occurred across the major currency pairs and what could potentially lay in store in the coming weeks.
The euro/dollar initially rallied strongly in the early part of the election but has since collapsed back below the 1.10 handle as a Trump win became apparent. Although the pair was initially viewed somewhat as a safe haven currency, the capital flows turned around quickly, and the greenback’s sentiment actually rose relatively steadily throughout the session. Expect to see the EURUSD return to a fairly normal semblance of balance over the next few days. The 1.0920-40 range is unlikely to hold in the medium-term and you should expect to see the pair back above the 1.10 handle in the coming week.
The Cable was one of the few pairs to actually benefit from Trump’s election and, despite suffering a relatively strong swing, managed to keep some of its gains to finish the session higher. In early trade this morning, the pair looked to be continuing its bullish run following an uptick in the UK RICS House Price figures, but much will depend upon the pending US Unemployment Claims result. Ultimately, the Cable’s upside is relatively limited given the presence of the 50 and 100 Day EMA’s which are likely to cap any bullish moves.
The Aussie dollar was battered fairly strongly by the election result given its status as one of the risk currencies. Subsequently, yesterday’s low took the pair back below the 76-cent handle but it has since managed to claw back some of the losses and it looks to be steadying in early trade. The Australian economy has plenty of problems on the horizon and it is likely that the looming spectre of a Trump presidency, at least in the medium-term, will have little impact upon the pair.
The dollar/yen was clearly a net beneficiary of the election result, as were most of the dollar pairs, and the Trump win has seen the USDJPY gain strongly. Initially, the USDJPY saw plenty of selling as capital flowed into safe havens, such as the yen, but this pattern managed to reverse when it became apparent that we were not seeing an immediate collapse of equity markets globally. The pair is likely to stabilise in the weeks ahead and a return to a focus on economic fundamentals should be expected.
The General Economy
Much has been said on both sides about the risks that a Trump presidency poses to global trade and the world economy. However, typically there is little economic substance to the negative arguments around trade. Although Trump has campaigned upon the platform of reforming world trade, and returning many of the manufacturing industries to the US, it is highly unlikely that he will be able to effect ongoing change in either arena.
In particular, global trade is typically based around the concept of comparative advantage and value chains.This means that the US simply can’t arbitrarily deny Chinese or Mexican imports and produce these good domestically lest their consumers be prepared to pay significantly more for that needed T-Shirt at Walmart. Any such move to return these inefficient manufacturing bases to the US would therefore be political suicide as living standards would drop.
Additionally, any repudiation of trade agreements or the cancellation of TPP would also cause some angst for the US economy. These types of agreements are not negotiated in a bubble and the ramifications of changes could be wide ranging indeed. Subsequently, although we may see some significant changes to the composition of US based trade we are unlikely to see a sharp swing towards protectionism. Any such move would only erode the US Terms of Trade, and lead to retaliation from other world nations against US goods, particularly in industries where they are able to alter world relative prices.
Subsequently, although we may see policy changes from a Trump White House, we are unlikely to experience a breaking away from world markets or a drive to levy import tariffs and quotas.
Ultimately, a Trump presidency will be similar to many others in that it will be characterized by compromise and a Congress that will seek to limit his power. The take-away is that the post-Trump world is likely to look very similar to the Pre-Trump world but with a worse presidential hairstyle. Subsequently, take a breath and allow the global capital markets to settle over the next few days, and then we can all return to debating about the Fed’s potential actions in the coming month.