US elections: Currency implications - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the surge in yields is likely to support the USD particularly against very low yielding JPY and EUR. 

Key Quotes

“Already the rebound in the USD against these currencies has fully reversed the fall overnight on the initial reaction to the Trump victory.”

“The rise in the USD vs these currencies might be slowed if the rise in yields dampens the US and global equity market.  Sectors of the US market that rely on international trade and global equities may be undermined by the Trump America first message.”

“EUR may also be undermined by thoughts that the trend towards anti-establishment populism in the UK Brexit vote and the USA Trump election will spill over to a defeat of constitutional reform in Italy championed by the PM Renzi on 4 December, and other elections in the years ahead.”

“Emerging market and commodity currencies have weakened.  They fell on the election result, with the MXN the biggest loser.  They attempted to rebound with the recovery in US equities.  However, they have weakened again in US trading.  This reflects the sharp rise in US yields and the spillover from a stronger USD against JPY and EUR.”

“However, another reason for the strength in the USD against emerging and commodity currencies is that Trump’s message is America first, this lessens the benefits of a stronger US economy spilling over to the global economy, and thus it is less bullish for emerging or commodity currencies that, at times, benefit from expectations of  stronger US economy.  A move against free trade, more generally, threatens many emerging markets.”

“In a broad sense, an America First policy combined with fiscal expansion should tend to boost US yields and the USD.”