We expect Trump's win to impact the FX market in three major ways, all likely to be USD bullish.
1) Fiscal stimulus: Trump's
focus on boosting infrastructure (one of the few policies mentioned in
his victory speech) and cutting taxes suggest a fiscal stimulus boost to
growth. After years of seeing fiscal expenditures growth declining,
leaving the Fed with the main burden of ensuring economic recovery, we
may be finally seeing fiscal policy pick up the slack.
Ironically,neo-Keynesian claims by liberal economists reaching from
Stiglitz to Krugman may find implementation via a Republican President
Trump. It remains to be seen how Congress will deal with Trump’s fiscal
proposals. Congress is now running Republican majorities in the House
and the Senate. The past overreliance on monetary policy, which has not
only been witnessed in the US,helped nominal and real bond yields fall
towards historical lows. A better mix of US fiscal and monetary policy
suggests yield differentials working increasingly in favour of the USD.
2) Trade: Trump
has made trade protectionism an important pillar of his platform.
Following through on his proposals to exit NAFTA or impose tariffs on
select countries could lead to an economic shock and hit risk appetite.
Currently, the market appears to be discounting the risk as more
idiosyncratic (as evidenced by the outsized move in MXN) but it remains
unclear what trade policy changes we can expect. Nonetheless, the
ultimate impact would likely be USD positive. Trump has suggested
thathigher tariffs would be directed against more open economies (for
example, Mexico and China), implying bilateral USD strength.
3) Corporate Tax Reform: Comprehensive
tax reform stands out as one of Trump's few detailed policy proposals
and we think passage of a bill is likely given similar interest from the
Republican Congress. Corporate tax reform would likely include a
repatriation taxholiday (a one-time reduced tax rate on corporate
profits broughthome) which would incentivize repatriation of foreign
currency into USD. As we discussed previously, (US Election
2016:Fighting the Fear of the Unknown, July 12,2016) this reform will
likely provide modest support for USD. While a large amount of offshore
earnings are already in USD and it's difficult to say how much of the
foreign currency holdings are hedged, there should nonetheless be some
amount of USD buying and foreign currency selling. The last repatriation
tax holiday (the Homeland Investment Act) resulted in $300bn of
retained earnings brought back in 2005 (nearly 5x increase over previous
years). With a much larger pile of offshore earnings today, there is
scope for even larger repatriation, but the inherentuncertainty around
the size and timing of these flows imply a moderate long-term USD
The impact of the above three factors is clearly USD bullish.