3 reasons why Trump could make the forex industry great

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President-elect Donald Trump has had major contradictions as a candidate. He managed to woo the working people that lost their manufacturing jobs but promised tax cuts on the wealthy. His economic plan’s numbers did not add up, and his erratic behavior makes him unpredictable. He even praised the unpredictability as a negotiation tool.

While his policies could be messy and even dangerous, there are good reasons to believe that his elections will be positive for the forex industry.

Here are three reasons to be hopeful for anybody involved in the industry:

1) Undoing Dodd-Frank and other regulations

While Trump has a low attention span, his party now commands control over both the Senate and the House. This means they could pass quite a few laws that were approved during the Obama years. This includes the massive regulation of Dodd-Frank that followed the financial crash. Less regulation on the financial sector has already boosted financial services stocks and could result in more activity also in the small US foreign exchange industry.

The industry has been squeezing in recent years, and its fortunes could improve now. While not all the troubles are related to Dodd-Frank, an environment of looser regulation could have a positive impact. This includes easing limits on leverage, allowing for firms with lower capital to jump in and removing other barriers for brokers and traders alike.

2) Higher Volatility

Election night and the days that followed saw very high volatility in markets. GBP/USD rose initially, crashed afterward and then surged to new highs. It isn’t the only currency pair that saw wild moves.

And there are good reasons to believe this will continue.

The aforementioned erratic behavior of Trump and unpredictability could provide many surprises to markets. Such volatility is not only the result of the administration’s decisions but also the result of the reactions of the Federal Reserve which could provide even more confusing forward guidance.

3) Boom and Bust?

Trump wants lower taxes but fiscal spending, specifically on infrastructure. This will result in a bigger debt. The leap in bond yields in the days following the elections reflects this. It also promises more growth and more inflation, justifying higher interest rates. The odds for a rate hike in December have risen.

Everybody wants stronger growth after long years of anemic growth, but also no recession. A rapid expansion rate now could result in a bubble: a bubble in inflation: higher prices due to government spending and lower taxes as well as other bubbles, perhaps financial ones, as regulation is loosened.

And after a big boom comes a big bust.

The best times for forex brokers and traders are in busts. It is not nice to say this, but busts result in higher volatility. Busts also mean that investment in stocks is less attractive while speculating on currencies is more lucrative.

It is important to note that in theory, Republicans oppose raising the national debt so that they could curb some of Trump’s plans. However, he won the elections despite tepid support from them, and he has the mandate, at least in the first 100 days of grace.

What do you think?

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

4 Comments

  1. I don’t think Trump will do anything jeopardize the stability of the banking system and increasing leverage limits would do that. Unlike the past few administrations, the bankers don’t own Trump. It would be impossible to add another $9T+ to the national debt if banks crashed and were bailed out again without crashing the world economy. The bond market will run for the exits when debt hits the $22-$24T range and we are already at $19T. I wouldn’t be surprised if parts of Glass-Steagall were reinstated to reduce the ability of banks to trade, or eliminate their ability all together, since it is a major source of systemic risk. I think he and the people he plans to hire are well aware of these issues.

    I agree that volatility will increase. I think there is a good possibility that the EU alliance will be history within the next couple of years. I believe we’ve reached a tipping point (per Malcolm Gladwell’s book by the same name) as indicated by conventional wisdom being absolutely wrong about Brexit and Trump victory. Renegotiating trade deals worldwide is likely to decrease GDP growth outside the US and increase it in the US which would cause USD to strengthen as long a trade wars are avoided. So, much more tipping point related turmoil ahead.

    I agree with the growth/inflation picture but I think there are a whole lot of levers that can be pulled that inflation could go either way. Too many variables to predict at this point.