It will take a very long time to understand the implications of a Trump presidency.
Big picture, it re-enforces the world’s shift away from globalization.
In the short-term, the market will likely focus on the following three markers:
Trump rhetoric. Does
the potential president-elect sound “presidential” today? Are there
signs of moderation in policy, particularly its most controversial
aspects on foreign policy? How quickly do we find out about presidential
appointments, to the post of Treasury secretary in particular, and are
is an unambiguous rise in policy uncertainty and the key question is
how much does this impact near-term US and global growth. Both the Fed
and the markets will be closely scrutinizing upcoming releases, but we
will have to wait until the week of November 21st for the first business
confidence surveys (Markit PMI).
It is reasonable to assume that the Fed may put December rate hike
preparations on hold until more clarity is reached on the data, but even
more importantly the market will be looking for confirmation that Chair
Yellen will not resign. Trump has been particularly critical of her
term so policy continuity will be particularly important.
As far as the dollar goes, there is a clear tension between the
negative impact of lower Fed expectations, higher uncertainty and risk
premium on US assets compared to the positive implications of Trump’s
fiscal and corporate tax programs on growth and corporate tax
repatriation. We view the impact as unambiguously negative for EM currencies
For developed market currencies the tension between lower Fed expectations near-term but a more positive fiscal story medium-term
is balanced enough to keep our forecasts and medium-term dollar bullish
outlook unchanged. The one exception to our dollar positive forecasts
is USD/JPY, where we view both the Asian geopolitical and risk-aversion impact as sufficiently strong to re-enforce our conviction on our year-end target of 94.