Trump Effect, Make Dollar Strong?

February 02, 2017
Trading Forex - What is the “Trump Effect?” The lightly challenged ascendancy of Republican front runner Donald Trump to capture his party’s nod to potentially face Democratic front runner Hillary Clinton in an election nine months away could create investment market volatility, various institutional research reports say. But it is economic factors and not Trump that are currently having the most significant impact on market movement, say other reports.

 US stock markets plummeted initially (The Dow Jones Futures fell 800 points at one stage) but recovered overnight. US Dollar sellers sought refuge during voting in the ostensibly safe havens of the Yen, gold and even the Euro, although the US Dollar has not been as affected as much as was initially anticipated.

Following this recovery, markets now think there is a strong chance of a Federal Reserve interest rate hike in December. While the initial furore that surrounded the election result may have muddied the waters somewhat, a survey by Reuters showed that 85 percent of respondents expected the interest rate raise to go ahead in December as had been widely anticipated, regardless of economic events following the presidential election. The uncertainty over which, if any, of Trump’s policies will actually be implemented and the ways in which that could happen will continue to create nervous currency fluctuations and, as always, that creates opportunities for everyone to use automated market orders to capitalise on this spikes and troughs.

Donald Trump

Sterling did not move significantly, even after EU Exit Minister, David Davis, reaffirmed his stance that Article 50 will be triggered by April 2017, and the UK government expressed confidence about winning their Supreme Court appeal. The UK currency is not doing too badly compared with recent rates, and is not only holding on to its recent strength but pushed ahead again after the National Institute for Economic and Social Research (NIESR) estimated that UK inflation could reach 4% next year. That removes any chance of another rate cut and brings the BOE into a focus on rate hikes. They have said they would ‘look past’ inflation on its own but. If it does hit twice their target, they’ll have to look straight at it and interest rates may well be on the rise. However, shock waves from the US election will also have an impact and further ramifications from the Article 50 standoff will affect the Pound.

 Chinese exports drop, inflation rises

Chinese export figures dropped by a remarkable 7.3% this week, with capital outflow figures bringing China’s foreign exchange reserves to their lowest level since January 2016. This was a cause for concern regarding Chinese protection of their reserves and as a result, the Yuan fell the lowest rate for almost six years. This currency weakness is a boost for Chinese exports, but not such great news for the Chinese economy and its global trade partnerships.

Figures also released this week showed that Chinese inflation grew at the fastest rate in six months throughout October, to 2.1 percent, strengthening the Yuan and also offering a lift for both the Australian and New Zealand Dollars, given the importance of the Chinese export market to the fortunes of these currencies.

 Donald Trump has drawn scorn from economists for his threats to launch a trade war with China and to renegotiate the terms of US sovereign debt. Less noticed, however, have been the Republican presidential candidate’s apparent threats to dismantle another decades-old American orthodoxy: the “strong dollar” policy.

The property developer has been consistent in recent months in warning against a strong exchange rate, even though the US has — notionally at least — adhered to a “strong dollar” policy since the 1990s.

In August last year Mr Trump declared the dollar was “hurting” the US and leading to “huge disadvantages” for companies’ competitiveness. “It sounds good to say ‘we have a strong dollar’. But that’s about where it stops,” he told one interviewer.

Mr Trump doubled down on that message earlier this month, saying that while he loved the concept of a strong dollar, it risked causing havoc for the US economy while delighting China, which he and others accuse of engaging in years of currency manipulation aimed at gaining a competitive advantage over American manufacturers.

Emerging markets feel the strain of US Dollar strength

Emerging market currencies are still feeling the strain of US Dollar strength following the US Presidential Election. Post-election currency market volatility has now taken its toll on the Brazilian Real as well as the Mexican Peso, as the Brazilian currency fell to its lowest level against the US Dollar since June. The US Dollar has shot up more than six percent against the Brazilian Real since the election. In light of the current currency volatility, the Brazilian central bank has suspended their planned currency swaps contract auction, which was designed to prevent further strengthening of the Real.

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