OK so you're as surprised as everyone else at the outcome of the U.S. election. So, what does a President Trump mean for the FX market? Who are the winners and losers?
1.The U.S. dollar
2.The Swiss franc
3.The Japanese yen
The U.S. dollar is still the most-traded currency in the $5.1 trillion a day FX market according to the latest BIS Triennial Survey. It has been strengthening since 2011 (see broad U.S. dollar index chart) in the belief that the Federal Reserve will normalize (raise) interest rates as job creation continues and inflation reaches 2 percent.
Trade-weighted U.S. dollar index vs. major currencies
My U.S. dollar view is torn between what appears to be two divergent Trump policies, isolationism and lower taxes. Isolation has an implicit lower dollar to help US exports, while lower taxes foster a stronger dollar over time as the US economy strengthens.
In isolationism, I don't see Trump supporting a weak dollar or a weaker dollar. Weak is not in the Trump vocabulary. Period. I think the U.S. dollar will rise as the U.S. economy breaks with Obama policies and adjusts positively to the Trump lower corporate taxes (the U.S. has one of the worlds highest corporate taxes) that promote higher growth and higher tax revenues (higher tax rates increases tax avoidance and lowers tax receipts), higher spending, and higher inflation. The U.S. dollar is set to rise further.
The Swiss franc is regarded as a safe haven currency when uncertainty and volatility is prevalent in the markets. Short-term traders (generally trades held less than an hour or two) will trade the franc back and forth today to make a few shekels and for those that have less enthusiasm for a Trump economic turnaround, they will find themselves increasing their exposure to the franc. As my regular readers know, I'm not the biggest fan of the Swiss franc, given their negative interest rate policy (Negative interest rates: A disincentive to risk), but the safe harbor status of the franc can't be ignored in times of uncertainty. Over the course of 2017 the Swiss franc will maintain its store of value in the FX market.
The Japanese yen has been manipulated for years by the Bank of Japan trying to keep the yen artificially weak in the face of badly performing monetary policies and unrealistic inflation goals. I don't believe that manipulation in FX ever works over time. And, because the Japanese have been at this for many years, I think the yen is poised to strengthen once this calamity curtain is pulled back. I have recommended buying yen from 112.00 and I see little standing in the way of 95.00 aside from verbal intervention, which doesn't work.
Trump campaigned on terminating the North Atlantic Free Trade Agreement and calling it the worst trade deal ever signed anywhere. Our neighbors to the North and South will see their currencies suffer as uncertainty over a future without NAFTA lingers.
China is and has been an easy target for Trump. He will continue to skewer the Chinese on trade and currency manipulation all during his presidency. He will do this to keep the appearance of pressure on the Chinese to enact reforms that benefit the U.S. but the reality is that China does nothing that is not in the interest of China.
Commentary by Keith Underwood, a 25-year veteran of the global foreign exchange market. He is currently CEO of Underwood FX, a firm that provides traded markets intelligence and expert testimony to the legal community and financial institutions globally. He is also a FINRA dispute resolution arbitrator and an adjunct professor of economics at Mercy College in Dobbs Ferry, NY.
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