The upset victory of Donald Trump shocked financial markets and led to weakness in the US dollar against its major peers: the euro, the pound and the safe haven yen of course. However, things turned around quite quickly as the market’s attempt to bounce eventually succeeded, and even “bigly” as Trump says. EUR/USD fell nearly 400 pips from the highs, USD/JPY had a 450+ pip swing and also GBP/USD had a roller-coaster day in an event which is not totally unrelated to Brexit.
What’s going on? What’s next? Here are four reasons for the move and a forecast to the next one.
- Smooth transition: Trump made a conciliatory acceptance speech, sounding as presidential as possible, very different from his campaign. Also, his rival Hillary Clinton chose to portray optimism despite admitting the loss was painful. President Obama followed suit by being hopeful. The smooth transition soothed markets. It’s important to remember that Trump refused to accept the election results in case he lost.
- Fiscal spending?: Trump promised quite a lot of spending and tax cuts. His proposals were never realistic and contradictory like many of the things he said. However, markets seemed to believe them. With the Republicans controlling the House and the Senate, Trump could pass any plan. That’s the theory. However, Republicans preach for fiscal discipline and crazy spending plans are not likely. But that’s for another day. Today markets big-league spending. Deficit spending means borrowing more money in bond markets, and this triggered a sell-off there. And higher bond yields make the dollar more attractive.
- Pendulum swing: Reactions to big events are always exaggerated. The big sell-off was followed by a correction and perhaps also this correction is a bit out of proportion. Nevertheless, it also played a big role in the dollar buying.
- Fed hike after all?: With all the cheering in US financial markets and the stability all around, perhaps financial conditions are ripe for a rate hike. A rate hike in December now has higher chances, over 80%. And interest rate expectations are of course the basis for currency moves.
And what’s next? These mood swings usually don’t last too long. While they provide many opportunities for traders, we have seen that things calmed down quite quickly after Brexit, before waking up again. Maybe this time is different, but perhaps it is better to lower expectations. And maybe the doom and
And maybe the doom and gloom could return: Trump could turn back to his nasty self, on Twitter and elsewhere. His pending trial regarding the now-defunct Trump University is due in November. Republicans may pour cold water on spending plans. Democrats in the Senate could still filibuster any proposals.
The Fed could express more caution, especially if the data remains OK, but not too exciting. If many of these things happen, we could see the dollar slide again, alongside stocks, with another swing of the pendulum.
What do you think?
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