The USD continues its post election rally
The final two weeks of the U.S. presidential elections were filled with high stakes drama as another FBI investigation on the Democratic candidate’s emails joined a sexual harassment scandal involving the Republican candidate. The USD lost ground across the board as risk aversion gripped investors that were having a hard time focusing at the economic fundamentals with so much political noise.
Election night proved to one to remember as the initial shock of early returns showed Donald Trump building a sizeable lead, that he would not relinquish. As the elections moved off script, the EUR/USD broke above the 1.12 price level but could not hold. The end of the EUR rally was the call from Clinton to concede the election. The uncertainty was completely gone at that moment and markets priced in the end of the elections with the USD appreciation that continues today.
The end of the electoral process was always going to favour the USD regardless of the outcome. The surprise result added extra volatility, but ultimately the economic data favours a strong dollar ahead of the U.S. Federal Reserve monetary policy decision on December 14. The interest rate divergence should widen as expected regardless of the change in leadership in America.
Safe haven assets like gold have lost their lustre and the NAFTA pairs (CAD and MXN) are down on speculation of trade terms renegotiation. There are lots of unknowns about how big Washington will change under Trump’s management and the markets will react accordingly.
The EUR/USD lost 0.493 in the last 24 hours. The single currency has given more ground to the U.S. dollar after the initial shock of Donald Trump reaching the White House after a volatile final stretch of the elections. The currency is trading at 1.0891 on the back of a strong stock market that is quickly pricing in the effects of Trump’s plans to boost growth in America. The upcoming Italian referendum has spiked political risk on the other side of the Atlantic leading to EUR weakness.
One of the biggest questions surrounding the USD and the elections is if the victory of Donald Trump puts the Fed rate hike in doubt. The U.S. Federal Reserve should still be on track to deliver the much-anticipated interest rate raise of 2016 as the elections are a leading indicator that in fact have not changed the health of the U.S. economy and will not for several months. Given the Fed was ready to act regardless the outcome, now with a known result in hand it would be seen as interference not to go through with a tightening, however small of the monetary policy in the U.S.
Markets have reacted positively to what once thought of an outside chance of Trump winning the presidency. The most outrageous of his policies have gotten far less play after the elections that they did on the campaign trail for both camps. So far the more is known about his potential team and agenda, the different sectors that are tied to it have gained.
Inflation has been a concern as it has remained lower, but the Trump team is promising a push for higher spending in infrastructure and fiscal stimulus through tax cuts that could spike inflation expectations. The impact has been positive for stocks, but has put pressure on the fixed income market.
The anti-trade stance of his campaign has not been tested yet, but is the main reason emerging markets and trading partners of the U.S. like Mexico and Canada are seeing their currencies drop. Both nations send more than 75 percent of their exports to the U.S. and a reintroduction of tariffs could reduce that significantly. It remains to be seen if the benefits of global trade can be reaped without the secondary effects like displaced jobs.
It remains a boastful challenge that won him converts but could prove to be a harsh trick to pull off. The Trans Pacific Pact could be the first casualty of the Trump presidency as Senate Majority Leader Mitch McConnell has said that they won’t discuss the TPP until after President Trumps inauguration in January, leaving no room for President Obama to ratify it during his lame duck session.
Market events to watch this week:
Friday, November 11
11:00am USD Prelim UoM Consumer Sentiment
11:50am CAD BOC Gov Poloz Speaks