Trump could sabotage his plans & what that would mean for USD
Trump’s Presidency has started with a bang mired in drama and discord. That has confirmed that he very literally intends to see through much of his electoral rhetoric, never mind how outrageous or impractical. If he continues down that path it could have significant ramifications for USD.
In the run-up to Trump’s victory there was much debate about some of his statements being more symbolic rather than being actual objectives. Orders to build the wall along the US/Mexican border and the ban on Muslim travellers from certain countries has firmly dismissed that notion.
What Trump proposes to do is nothing short of radical. He appears to want to reverse globalisation, re-focus global agreements from multilateral to bilateral (giving the US more negotiating leverage), increase the trend growth rate of the US economy to 4% (currently ~2%), deregulate, reform the tax system and repatriate manufacturing back to the US.
Many of these objectives are generational in nature rather than being doable in just 4 years i.e. the Presidential term or 8 years if he wins the next election. If that wasn’t challenging enough, Trump is also engaging in petty battles, which will waste time, energy, resources and political capital creating the prospect that he may end up achieving very few of his key objectives.
That would set the scene for some serious disappointments for investors. If many of economy-boosting measures don’t come to pass as he gets bogged down in political spats, the USD is likely to suffer further falls. The stock market is still giving him the benefit of the doubt, but the currency markets may already be sensing policy set-backs.
The fall of the USD index having taken-out some important support levels coupled with USD longs melting away, could be moving beyond a mere correction towards a bear market. Another factor could be that the currency markets know that the protectionist minded administration will attack any strong USD rallies. Indeed, they wasted little time accusing China, Germany via the EUR, and Japan, of being currency manipulators and stealing US jobs.
All this uncertainty isn’t made easier by the fact that Trump and his underlings sometimes contradict each other and even themselves. But the strident protectionist rhetoric, which has been consistent, does suggest the possibility of looming trade wars and makes a negotiated settlement over say USD exchange rates harder to achieve as was done by former US President Ronald Reagan with the Plaza accord in 1985. Reagan had a lot more international goodwill back then than Trump does today.
The other factor is the new US administration is openly hostile towards the increasingly fragile EU and the EUR making it even more likely that it will crack at some point potentially unleashing chaos in the global economy and financial markets.
JPY and CHF could see strong rallies on the back of geopolitical strife and disappointments over US growth as investors seek safe-havens. However, these are still early days and it’s possible that the new administration will get into its stride, learn to deal more diplomatically with foes and friends alike and concentrate its energies on boosting the US economy. If that’s the case a return to more normal FX markets driven by old fashioned interest rate and economic differentials is still a possibility
TECHNICAL ANALYSIS: EUR/USD – slow grind upwards through political flack
Amid US accusations of currency manipulation lobbed at Germany, the EUR has managed to keep climbing even as some important European elections loom.
The charts suggest the action for EUR/USD remains bullish, however, as seen last week with the positive USD/JPY signal, chart patterns can quickly be destroyed by political rhetoric. But with the USD sell-off looking like it may have further to run, it’s possible EUR/USD could make it to 1.09-1.10.
For the moment, the pair look as if they’re working through a small consolidation pattern, a daily close above 1.0800 would suggest further upside action. Although the daily RSI index is still neutral, the pair are very close to the upper Bollinger band suggesting that upside action could continue to be slow and possibly limited.
Any sustained upward move would need to tackle resistance at 1.0856-8, 1.0880 and 1.1058. If, however this rally is near its end, then support levels at 1.0750, 1.0630 1.0597-9 will become important testing points for the bears.
By Justin Pugsley, Markets Analyst, MahiFX