Posted by Rewan Tremethick on November 18th, 2016.
2016 turned out to be a pretty dramatic year. In the wake of the latest turn up for the books markets and analysts are still scrambling to understand the new political landscape and identify the key risks. Surprisingly, the immediate forecasts regarding the fallout of a Republican victory in the US election turned out to be wrong.
But what does Donald Trump’s election victory mean for your currency transfers?
Because the US Dollar plays such an integral role in world trade, the latest developments in the States have affected currencies across the globe.
Many were already facing key risks and concerns, but has the prospect of President Donald Trump given markets even more to worry about? Here are how the majors are going to be affected.
Pound Sterling (GBP)
Pound Sterling remarkably become the best-performing currency in a basket of 32 majors following the US election. GBP USD and GBP EUR surged to around five-and-a-half-week highs.
The outlook for the Pound could be much improved following the US election, with the UK potentially becoming one of the less-risky economies in which to invest. With an uncertain future ahead of it, the US economy is now facing a similar level of Brexit miasma. Things aren’t looking rosy for the Eurozone either, with fears that Trump’s victory could propel populist parties to power across the currency bloc.
By comparison, the initial shock of the Brexit vote is subsiding and the Pound is already battered, leaving less room for it to fall than the US Dollar or Euro should domestic issues develop.
Populist parties could threaten the future of the entire European Union thanks to their anti-austerity or anti-EU policies. Numerous Eurozone countries are seeing a strong rise in support for radical parties on both ends of the political spectrum, including the National Front in France, the Alternative for Germany (AfD), Italy’s 5 Star Movement and Spain’s Podemos.
Up until Trump’s victory the political establishment had largely dismissed the idea that these political outsiders could gain any real support. With an Italian referendum and a potential third Spanish election still to come in 2016, not to mention Dutch, French and German elections in 2017, there are plenty of opportunities for further political upsets in the coming months. Fears of this are going to weigh heavily on the Euro.
US Dollar (USD)
Forecasters had predicted a huge US Dollar slump if Donald Trump won, but the ‘Greenback’s fall was quickly reversed.
Unlike the fiery rhetoric seen on the campaign trail, the President-elect’s victory speech was humble and called for unity. This significantly calmed the markets, who began to wonder whether President Trump would be a much more composed figure than nominee Trump.
The future of the US Dollar is far more uncertain than its current movement on the markets would seem to suggest, however. While ‘Greenback’ demand is being driven by hopes that Trump’s $1 trillion spending plans will boost inflation, leading to higher interest rates, other policies may not be so USD positive. Trump’s aversion to free trade could significantly weaken the US economy, as could plans to deport millions of undocumented migrants.
Australian Dollar (AUD)
Donald Trump often claimed during his campaign that free trade deals are responsible for the decline in American manufacturing.
If Trump were to follow through with his plans to impose 45% tariffs on Chinese exports, Australia could be caught in the crossfire. Businesses in the Asian superpower would be hit hard, lowering demand for overseas goods as businesses are forced to shut down and wages and employment fall.
As Bob Carr, former Australian Foreign Minister, explains;
‘Australia’s growth since 2008 has come from China. No OECD economy is more dependent on China. China takes one third of Australian exports. Trump’s plan – effectively, to slice a few percentage points off China’s economic growth – would likely tip Australia into recession.’
The prospect could mute demand for the Australian Dollar until Trump gives more solid indication of his trade policies.
New Zealand Dollar (NZD)
Although many will have suggested the possibility in jest, it seems that a lot of Americans are more serious in their claim they could move to New Zealand should Trump become President.
In the 24 hours following Trump’s election, visits to New Zealand’s official immigration website saw a 2400% increase, while visits to New Zealand Now saw traffic rise from 1,500 visits per day to 70,500. Immigration New Zealand saw over double the number of average daily registrations.
Should a large number of Americans go through with their plans to relocate, New Zealand’s public services and infrastructure could be placed under even more strain, weighing on the Government’s finances. Anti-migrant sentiment is beginning to show in New Zealand – fearful of another ‘Trump-style’ upset, markets could become wary of the New Zealand Dollar.
Canadian Dollar (CAD)
Trump’s anti-trade stance is also a concern to Canada. The North American Free Trade Agreement (NAFTA) has borne the brunt of Trump’s criticism of free trade deals, with the then Presidential candidate describing it as ‘the worst trade deal maybe ever signed anywhere, but certainly ever signed in [the US].’
NAFTA allows tariff-free trade between the US, Canada and Mexico. The value of goods and services exchanged between Canada and the US totalled around CA$2.4 billion every day in 2015. Canada is the largest trade partner of the US, while Canada is the top destination for exports for 35 US states. The addition of tariffs into this trading relationship would clearly have huge consequences for the Canadian economy.
As with its commodity peers, the ‘Loonie’ could remain on an uncertain footing until Trump either confirms or denies that he intends to end free trade.
‘Uncertainty’ – the Only Accurate Prediction Anyone Can Make
Trump is not the only headwind facing the major currencies, but he is currently the most pressing issue for many. Investors already had plenty to worry about, which is why the markets were hoping for a ‘status quo’ victory for Hillary Clinton, whose policies were similar enough to those of Barack Obama that her Presidency was unlikely to create particular upset.
However, what a Trump victory has done is helped cement politics at the forefront of risks to the currency markets. Traders are so concerned by developments in Britain, the US and the Eurozone that they have begun to ignore even the most impactful data in many instances.
The markets are always fearful of something. But regardless of whether those fears are justified, it’s clear that Trump’s victory has given investors plenty more to be concerned about.
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