Keith Underwood 2 Comments

Trump Change

What the Trump victory means for the FX market

OK so you’re as surprised as everyone else at the outcome of the US election and you have made currency predictions for next year. You probably added a slightly larger degree of uncertainty after the shock UK Brexit vote, but you none the less polled your FX banks for their forward looking strategic FX views, did your own research, and felt reasonably comfortable with your work product. What does a President Trump mean for the FX market? Who are the winners and losers?

Winners

  1. The US Dollar
  2. The Swiss Franc
  3. The Japanese Yen

The US 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 US Dollar index chart) fredgraphin the belief that the FED will normalize (raise) interest rates as job creation continues and inflation reaches 2%. As a macroeconomics professor, my US 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 US Dollar will rise as the US economy breaks with Obama policies and adjusts positively to the Trump lower corporate taxes (the US 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 US 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 BOJ trying to keep the yen artificially weak in the face of badly performing monetary policies and unrealistic inflation goals. Readers of my posts know well that I don’t believe that manipulation in FX ever works (3 Currency Intervention Lessons Never Learned) 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.

Losers

  1. Mexican Peso
  2. Canadian Dollar
  3. China

Trump campaigned on terminating NAFTA 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 US but the reality is that China does nothing that is not in the interest of China.

keith@underwoodfx.com

www.UnderwoodFX.com

 

Keith Underwood 3 Comments

3 Currency Intervention Lessons Never Learned

  1. Verbal intervention is not a viable long-term strategy.
  2. Unless other major central banks join in, it fruitless.
  3. Intervention only provides better levels for hedge funds to enter the trade.

For those of you that only know verbal intervention as HID (your significant other) yelling at you to do something, in financial markets it is the action of a very influential person (central bank person or Ministry of Finance person such as Taro Aso in Japan) telling anyone that will listen that they are not pleased that the market (traders, money managers…that’s right…smart people) has not priced an asset to their thinking/liking. So, just like listening to HID when they are yelling, you jump and take notice to legitimize HID, only to resume what you were doing after they depart. Financial markets are no different.

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Keith Underwood 1 Comment

US April Payrolls a Tepid +160,000 – Buy YEN and Volatility

The headline number is 20% below the previous 3-month average of 200,00 jobs created and the February and March figures were revised down by 19,000 jobs. While the NFP number is discouragingly below expectation of 202,000, average hourly earnings has risen by 2.5% over the year. While encouraging, hourly earnings alone will not provide enough ammunition for the FED to raise rates come June. External factors such as the slowing growth in China, Japan, Europe, and US will mix with negative interest rates to halt any hopes of increases in inflation. This toxic combination of low growth and stagnant inflation will create the next bout of volatility in equity, rates, and FX.

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Keith Underwood 2 Comments

4 Things That Worry Me

  1. The Japanese yen (110.50 today) is strengthening versus the US dollar (52 week range 110.27 – 125.86) and the yen is typically viewed as a safe haven currency during market uncertainty and turmoil.
  2. The 10-year US treasury yield (1.74%) is lower (30% from it’s June 30th 2015 peak of 2.50%) even as inflation expectations are picking up. Safety is being sought as yields drop.
  3. Gold (1220.50) is, and has been rising, since December and now stands nearly 21% higher. Gold is also a safe haven for investors.
  4. Central bankers are using negative interest rates as a policy tool. Disaster.

 

Am I missing something here? Why are these 4 (should we add in oil as a fifth?) indicators painting such a negative picture and the world is just shrugging with acceptance? These 4 macro measures of the health of the investment community are not good. They are each, on their own, somewhat interesting, but together, these smell like the tin of tuna in the back of the fridge that was forgotten about months ago.

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