Dollar Lower as Trump Wins US Election

In a result that was not seen by pollsters or markets,
Donald Trump has, according to US networks, won the US presidential election.

As results came in through the night and the swing to Trump
became apparent, equity index futures were crushed, Japan’s Nikkei Index at one
stage being 1000 points down, and the US dollar was hit hard as part of a “risk
off” trade.

USD/MXN, the bellwether pair for the election, dropped to
18.1650 in trading soon after polls closed as exit polls predicted a Clinton
victory, however as Trump crept up in the polls the pair jumped higher,
ultimately hitting a high 20.77 – a fall for the peso of 14.3%. The fall in the
peso prompted Mexican authorities to call an emergency meeting to discuss their
response to the financial fall out from the election.

Elsewhere, the euro rose 2.7% and USD/JPY fell 3.7% as
markets reacted, hitting a high of 1.1299 and a low of 101.20 respectively.

As confirmation of Trump’s victory was released, markets reacted
calmly, with the dollar bouncing slightly across the board.

The uncertainty surrounding future policy had clearly
spooked markets, however analysts are now striving to provide some insight for
their customers.

Danske Bank analysts, in a note to clients, say they believe
the biggest impact will come in foreign policy rather than the form of domestic policy changes, but note
that any changes should be modest due to likely resistance from Congress, even
within the Republican Party. “Still, Trump’s room for manoeuvre is larger as
the Republican Party will also control Congress,” the analysts say. “In the short
term, we do not expect growth to be hit by Trump uncertainties through lower
confidence and hence we expect the economy to continue to grow around 2%. In
the medium to long term, uncertainty is set to rise and we think the negative
effects of more protectionism and tougher immigration policy will dominate the
possible positive effects of less regulation, lower taxes and infrastructure
spending.”

Trump’s
victory has focused attention on the future of Federal Reserve chair Janet
Yellen, of whom the new president has been very critical. “Throughout the
election campaign, Trump has shifted stance and most recently he criticised the
low interest rate policy,” Danske’s analysts say. “Trump has said that the Fed
has created ‘a false stock market’ and that Yellen is ‘very political’ as rates
are low because of Obama.

“We expect
Trump to replace Fed Chair Janet Yellen in 2018, as she is a Democrat. Such a
move is very unusual in an historical perspective. We still expect the Fed to
hike in December, as we expect financial markets to recover before the December
meeting and do not expect a major impact on confidence indicators in the short
term. We expect the Fed to hike twice in 2017 in June and December (i.e. a
total of three hikes from now until year-end 2017) to offset fiscal boost to
growth in 2018.”

At the
results panned out inevitable comparisons were drawn with the UK’s vote to
leave the European Union in June, with opinion polls and exit polls showing one
result only for the reverse to gradually happen.

Nigel
Green, founder and CEO of deVere, believes the election result is a “bigger
deal than Brexit” and expects “enormous” volatility in markets. “Buckle up for
a bumpy ride in the global markets,” Green says. “Whether President Trump
will, in fact, do what he has said he will do throughout his campaign, or
whether it was just soaring rhetoric to whip up his support base, for now,
Trump winning is sending shockwaves across the world.  As such, enormous
volatility can be expected in the markets.

 “The
Brexit result was a real shock and created instability in the UK, but this is a
far bigger deal as this creates instability on a much wider, international
scale,” Green continues. “The markets’ main concerns include Trump’s
protectionist policies, focusing on potential trade wars with China – America’s
largest trading partner – and with Mexico, it’s third largest. 

“In
addition, with Trump having said certain countries are ‘cheating’ due to their
undervalued currencies, currency tensions should also be expected,” Green adds.

Analysts at the Royal Bank of Canada say investors will need
to wait for clues from Trump’s acceptance speech and other statements in coming
weeks due to the absence of policy indications during the campaign. “While the Republican-controlled
Congress makes it hard to very hard to imagine unfunded fiscal expansion, the
president has a fair amount of power when it comes to trade policy (which harms
both MXN and CAD),” RBC’s analysts say. “Longer-term, this is a big jump into policy uncertainty but it seems
likely to lead to rising protectionism.
That would favour countries with
stronger domestic demand and hurt small open economies, particularly those with
less elastic imports (commodity importers).”

Meanwhile,
Morgan Stanley analysts say the risk environment will be determined by the
market’s interpretation of how Trump will set out his policy path and set up
his team (political jobs and advisors). “It is possible that campaign rhetoric
may be replaced by a more serious discussion concerning future policy strategy,
which would support risk,” they say.

Colin_lambert@profit-loss.com

Twitter
@lamboPnL

Twitter
@Profit_and_Loss

Colin Lambert

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