Against all odds and to the surprise of many, Donald Trump will be our next president. And given his track record of unpredictability in this election cycle, the president-elect could surprise many more times over the next four years — especially when it comes to the currency markets.
Just before the election, I had mused that an unexpected Trump win could shock markets as investors adjusted to a new reality, as was the case with Brexit. My colleague Jeremy Cook also shared a brilliant analysis with Bloomberg TV on how a Trump victory might move currency markets. Among his predictions: a weaker Mexican peso and Canadian dollar, and a stronger U.S. dollar as federal spending on infrastructure and inflation picks up.
Turns out our predictions weren’t far off.
What the immediate aftermath tells us
First, the market shocks happened. Recall that on the eve of the election, forecasters gave Hillary Clinton up to a 90% chance of winning, and so investors were widely expecting the Democratic candidate to cruise to victory along with the perceived “status quo” certainty she would have brought to markets. But by midnight on Election day, as Trump was headed toward victory, investors were shocked and futures for the Dow Jones Industrial Average fell as much as 800 points while the dollar plunged along with it. Around 3am, Trump delivered a conciliatory speech that calmed investors and stabilized the markets, which then led to a stronger dollar and a triple-digit stock market rally by Wednesday afternoon.
But there was more to it than that. Outside of the U.S. markets on Election night, when investors were forced to speculate at a moment’s notice on what a Trump presidency might bring, we were also given some clues on what to expect from the foreign currency markets in the future.
For example, with uncertainty and a lack of detail around Trump’s trade agreement plans, investors were gravitating toward the Japanese yen, which has traditionally been perceived as a safe haven. Meanwhile, as investors foresaw the North American Free Trade Agreement (NAFTA) potentially moving into Trump’s crosshairs, the Canadian dollar tumbled along with the Mexican peso, which fell nearly double digits the day after the election.
Countries tied to emerging and developing markets felt the Trump effect, too. For example, the Australian dollar fell more than 1% (big in currency terms) the day after Election night as investors became uncertain about the U.S.’s trade agreements with China, Australia’s largest trading partner. Trump has been critical of China’s alleged currency manipulation and pledges to do something about it as president in an effort to protect U.S. manufacturing jobs.
What could happen in currency markets in the weeks and months ahead
Fast forward to more than a week after Election day, and you’ll see that each of these currencies (save for the Mexican peso) have largely stabilized as investors put them on the backburner. Instead, many investors are bullish on the U.S. dollar as they expect a Trump presidency and Republican Congress will bring heavier infrastructure spending and market-friendly tax cuts.
But as euphoria begins to fade and policy speculation begins to resurface, we could see many of those election night currency trade impulses return. And now that Trump is officially the president elect – and given the lack of available policy details — I also believe we can expect every tweet and spoken word between now and inauguration day (and afterward) to be analyzed by investors and potentially move currency markets.
That means if he talks tough on China, we may see more downward pressure on the Chinese Yuan and the closely-tied Australian dollar. If he talks about the wall or NAFTA, we could see the Mexican peso or the Canadian dollar fall further. And if he keeps a positive rapport with Russian President Vladimir Putin, look for continued ruble gains as the possibility of lighter sanctions on Russia comes into play.
The Bottom Line
It’s been a crazy ride heading into and out of Election day, and Donald Trump may stay true to form in keeping things interesting – especially in the currency markets. Given the lack of policy details on hand, many world currencies could very well move on a tweet or an off-the-cuff response from Trump. We truly live in unprecedented times.
Christian Hudspeth is a financial writer for World First USA, Inc.
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