Trump effect on USD, markets




Implications of a Trump presidency: The Fed Policy


Markets adjusting to President Trump

Since the election of Donald Trump to the US Presidency, financial markets have reacted positively. Stocks have surged to record highs, the dollar index rallied to its highest level since 2003 and US Treasury yields jumped by 60 basis points to 2.4%, the highest level since 2015. The revised view of a Donald Trump Presidency is that his fiscal largesse will spur growth in the US for many years to come...

A few days post-election, commentators and “experts” have written stories to explain the action in markets. Some of these stories may even prove true. But at this early stage, investors should recognize that markets mostly reflect hopes, fears, and high frequency trading shenanigans. Reality tends to arrive later. All eyes are focused on the first 100 days of the Trump administration.

The rise in optimism following the Trump election in the USA has seen US rates yields, the USD exchange rate, and the stock market rally significantly. This may reflect some pent-up momentum that was awaiting the conclusion of the hard-fought divisive election campaign that distracted attention away from investment, hiring and spending. It may also reflect the hope that a Republican-led Congress and administration can get things done.

The election of Ronald Reagan in 1980 provides the best recent precedent for the unexpected triumph of Donald Trump (in my opinion, the other post-war Republican takeovers of the White House --Ike in '52, Nixon '68, and W. in '00 - did not constitute a real break from the status quo.) As many people expect great changes from Trump, it is worthwhile to look at what the Reagan Revolution actually wrought.


USD/MXN: The Trump Trade

When it comes to currencies, the highly-touted “Trump Trade” has revolved largely around the Mexican peso. It has been no secret that US Presidential Candidate Donald Trump’s heavily protectionist trade policies, not to mention his stance on immigration, have targeted Mexico in particular. Besides proposing to build a wall between the US and Mexico, Trump has also repeatedly expressed his staunch opposition to the North American Free Trade Agreement (NAFTA) and has proposed broad restrictions on both Chinese and Mexican imports. The result has been increasing speculation that if Trump is seen to win the presidency, the Mexican peso could suffer dramatically against the US dollar.

USD/MXN Best Spreads


Trump is President Elect... and now what?

After The Trump Triumph

In the short term, the Trump triumph will mean economic uncertainty and market volatility.. That was evident on the election day as global markets were rocked by Trump's victory, which was accompanied by a weakening dollar, drastic declines of the Dow Jones, S&P 500 and Nasdaq, as well as markets in Europe, Asia and elsewhere. The real question is whether markets responded dramatically to anticipated future realities - or their own misguided expectations. In the coming weeks, the power transition in the White House will take place amid extraordinary political animosity and instability. After all, Trump's triumph has ensured the kind of political consolidation that Clinton could only dream about. As Republican majority will prevail in both the Senate and the House, Trump will take over the White House. He will be able and willing to effect real change in America - for good or bad.

What Trump means for China

Immigration, China and arrogance in the political establishment were at the centre of Donald Trump's campaign to become the US president. One might thus fear that punishing China could be one of the main aims of Trump's policy in the White House. A rise in protectionism could hurt Chinese exports, as the US is the destination of close to 20% of Chinese exports. A fiscal boost to US growth seems increasingly likely. More US growth would benefit demand from China. While an increase in tariffs on imports is likely, Trump has to be careful how much he goes down the protectionist path. China would be likely to retaliate in such a scenario and US importers from China would be hurt by higher duties on imports. China can let the market weaken the CNY further by simply not intervening to dampen the depreciation of CNY.

Trump seeks to drive the dollar down

If we buy the Brexit comparison, the FT's Authers writes, "A big sell-off of US assets is a given, as is a subsequent bounce." Authers deduces that the market sell-off will stay the Fed's hand. Also, "Emerging markets will be a particular victim due to their dependence on trade. They appeared to be at the beginning of a renaissance; that is now in question. Markets tend to overshoot, and this will produce some buying opportunities and bargains." Authers is always to be heeded. He writes "Extreme volatility is certain." Make no mistake: the US voter electing Donald Trump is an unmitigated disaster for the economy and for financial markets. We cannot write a scenario is which it's dollar-favorable, either. And for all we know, Trump seeks to drive the dollar down—it's good for exports, right?


Trump Trade Idea - RUB/MXN: How to build a Synthetic Pair to trade


US Election impact on Currencies: Clinton VS Trump

Overall, the two candidates represent virtually polar opposites when it comes to many of their respective economic policies and issues of concern. One of these candidates, a billionaire real estate mogul billed as the ultimate outsider, Donald Trump aims to shake up the US political establishment, which could potentially cause extensive market volatility along the way. The other candidate, a classic Washington insider with deep ties to the current administration and the political status quo, Hillary Clinton is seen as a relatively steadier alternative for USD, as she is essentially considered by many to be a potential extension of President Obama's legacy into a third (and possibly fourth) term.

Going forward, as their key economic policies differ in so many ways, Trump and Clinton should each have a substantial, but very different, impact on various key financial markets such as US Dollar, Euro, Yen, Pound and other important currencies as well as stocks, commodities and bond markets in the event of victory.

Donald Trump
Clinton on Wikipedia, Facebook and Twitter

Clinton received the most votes and primary delegates in the 2016 Democratic primaries, formally accepting her party's nomination for President of the United States on July 28, 2016, with vice presidential running mate Senator Tim Kaine. She became the first female candidate to be nominated for president by a major U.S. political party.

Donald Trump
Trump on Wikipedia, Facebook and Twitter

Trump is the second major-party presidential nominee in American history whose experience comes principally from running a business (Wendell Willkie was the first). If elected, Trump would become the first United States President without prior government or military experience, and the first without prior political experience since Dwight D. Eisenhower.


Clinton effect on US Dollar

As mentioned, Clinton is seen as the status quo candidate, unlike Trump. This status quo also extends to the very lengthy period of extremely accommodative monetary policy from the Federal Reserve. A Clinton administration is likely to continue favoring a more neutral-to-dovish approach to US monetary policy, in contrast to Trump’s comparative hawkishness. If this is indeed the case, the Fed’s status quo will likely be maintained and the future outlook for Fed interest rate increases could continue to be slow. This scenario is apt to weigh further on the US dollar. Additionally, a Clinton win would obviously preclude a Trump presidency, which would be good news for emerging markets targeted by Trump’s protectionist trade policies, including China and Mexico. In that event, those emerging market currencies would likely rebound against the US dollar, which could place additional pressure on the greenback.

Trump effect on US Dollar

As for the US dollar, Trump has repeatedly stated in public his position that the US Federal Reserve and Fed Chair Janet Yellen have been politically-motivated in keeping interest rates low. He has essentially accused the Fed of attempting to create false appearances of a healthy economy and stock market to embellish the Obama Administration. Trump has deemed the rising US equity markets as a “false stock market” that has been propped up by an overly accommodative Fed. This stance against what he sees as politically-driven dovishness provides a hint that if Trump gains the highest office in the land, he may be keen on instituting a more hawkish Fed. In that scenario, the possibility of higher interest rates going forward could lead to a stronger US dollar. In addition, Trump’s rhetoric on international trade issues has deemed his policy position as heavily protectionist. At least initially, this stance could lead to a further boost for the USD, especially against emerging market currencies like the Mexican peso and Chinese yuan.




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