US assets getting their own post-Brexit bounce
The post-Trump dollar decline ended quickly and its position as the true safe haven emerged once again yesterday afternoon. EUR/USD is lower, USD/JPY is higher and higher yielding currencies such as the AUD, NZD and CAD are retreating to pre-polling day levels, albeit gradually. The Mexican peso finished up yesterday although it is still down 5% over the past 48hrs.
We pointed to the parallels between Brexit and Trump many times in the period between the UK’s vote and the one in the US on Tuesday, and the market reaction is playing a very similar tune albeit sped-up; deep dive lower on risk before a recovery and an uneasy malaise.
The shortening of the timeframe between decline and rebound could be down to many things but issues around full Republican control of the presidency and the possibility that changes in tax reform, investment and regulation will come through quicker may help. Trump has also been called ‘an inflation time-bomb’ given his pledges to increase spending, so we must now look at Fed policy through a new lens. Similarly, although he was elected yesterday, he does not take the reins until January 20th.
Fed to still hike in December
The dip in the dollar yesterday coincided with a profound decline in the expectations of a Federal Reserve rate hike in December before they and the USD rebounded. As much as the Fed may want to come out and say that things have changed and the inflationary picture is now elevated, I think they still have to hike interest rates next month – and the markets are almost daring them to do so.
Fed member Williams backed this up yesterday by saying that gradual hikes “still make sense” and we will wait to hear what other members of the FOMC say.
What next?
Protests are ongoing in certain cities throughout the US over the vote and the result but we do not expect these to affect markets in a meaningful manner.
For now, all anyone in markets can talk about is politics and all they can talk about in politics is economics; the populist focus has now shifted back to Europe with Dutch, French and German elections next year. It is a toss-up as to whether the election of Trump will help or hinder similar parties in these countries.
Away from the States
Elsewhere things are getting back to normal and the Reserve Bank of New Zealand delivered an interest rate cut overnight. The statement within the announcement hints to us that this is the last cut of an easing cycle. The RBNZ remains worried about a strong currency moving forward however and pressure will return should NZDUSD return to prices around the 0.77 level.
In the UK, political and economic news has been non-existent in the past few hours. GBP/EUR has rallied as European political risk has increased with sterling benefiting from some comments made by Trump during his campaign that the UK would be ‘at the front of the queue’ for a trade deal with the United States.
For now, for global market moves we are going to have to wait on noises from both Trump and world leaders who will have to strike up relationships and agreements with him.