Trump could be a game changer for forex, economics & politics
It’s happened again – commentators, bookies and the markets were wrong over the outcome of an election, in this case the US one where Donald Trump won. The consequences of his victory will be fundamental for markets, the global economy and geopolitics for years to come.
The likelihood of this victory is a stronger USD (although that might not be tolerated for long by the new administration), and if some of his promises on trade protectionism are watered down it could even do some good for emerging market currencies, after all many commodities rallied and developing countries tend to produce them.
Also, Trump could be a powerful President as the Republicans kept control of Congress and the Senate. He will make an appointment in the supreme court making it more malleable. Who Trump appoints in key government positions will shed light on his likely policies. Also, he’ll have to build consensus with other Republicans, many of whom he alienated during the elections.
Trump’s policies are a mixture of Reaganomics with echoes of Roosevelt with deep tax cuts and a push to renew America’s creaking infrastructure. These policies are potentially inflationary, especially if combined with curbs on immigration and trade protectionism, the US’s ageing population and could quickly feed into sharp wage rises as unemployment is relatively low.
They could also add dramatically increase the US’s already big debt pile. Under Reagan the US economy powered on by de-regulation and tax cuts saw public debt soar by 186%, a higher percentage than under any other US President since.
Such policies will prompt the US Federal Reserve to raise interest rates more aggressively next year and with markets having taken Trump’s victory in their stride, following a short bout of nerves, a December rate hike is now likely. Meanwhile, bond yields are already soaring in anticipation of these inflationary policies and if sustained will deliver higher borrowing costs to the real economy. Indeed, the 30-year plus bond rally might be ending.
However, this does come with some important caveats. The Republicans will love the tax cuts – so those will likely happen. Infrastructure spending could be more problematic, never much favoured by Republicans, as it smacks of big government. Besides fiscal hawks could demand big spending cuts to compensate for the tax cuts so the scale of the stimulus could be muted taking pressure off the Fed to raise interest rates more aggressively and that would likely undermine USD support.
A big area of concern is Trump’s talk of trade protectionism as it would be very destabilising for the world economy. He seems hell bent on taking on China, even branding them as a currency manipulator, despite it acting to slow the rate of decline of CNY as capital leaves the country.
In the Eurozone, Trump’s victory could egg on populist parties and higher US bond yields could spill over globally creating a dilemma for the European Central Bank if it wanted to taper. But if Trump delivers strong global growth it might also help ease tensions within the Eurozone.
It may go well for Trump, the big stimulus will take pressure off central banks, and may reignite self-sustained global economic growth. The risk of course is that Trump could end up like the hapless Jimmy Carter struggling with high inflation and foreign policy disasters.
It’s almost certain that a Trump presidency won’t quite turn out as many expect as there are so many different dynamics at work, which could reinforce or even derail his policies, which should make for some interesting action in forex markets in the years ahead.
TECHNICAL ANALYSIS: EURUSD: support levels coming under pressure
Donald Trump’s victory with promises of much stronger US economic growth contrasts with a lacklustre Eurozone plagued with populist existential threats, which is mirrored in EUR/USD. But following last week’s move, the pair might be starting to look more interesting having been locked in a wide multi-month range.
After a huge spike-up on the Trump victory – USD sell-off was a lot shorter lived than expected – EUR/USD promptly fell wiped out successive support levels and that trend could endure for several months, especially if the December US rate rise looks on the cards followed by several more in 2017.
On the dailies the pair are heading into the lower Bollinger band, the RSI is still not oversold and a sell signal on the slow stochs is still playing out, but it looks close to a short-term reversal. It’s quite possible that the pair will bounce back and forth in a falling channel for a while.
Support is at 1.0830, 1.0820 and potentially down to 1.0710 if 1.0800 gives away too easily. Resistance: 1.0912, 1.0942-4 and 1.1023
By Justin Pugsley, Markets Analyst, MahiFX