With the Trump vs Clinton showdown set to begin and conclude precisely 6 months from today, the market is finally starting to focus on how either of the two presidential contenders will impact various asset classes. In this vein, over the weekend, Deutsche Bank's Alan Ruskin issued a report on how FX trading will be influenced by politics, noting that the channels through which the coming election will influence the USD are complex and sometimes contradictory - which will probably mute the response to some degree. Assuming Trump and Clinton are the candidates, here are some broad FX considerations.
1. Fed policy:
Given Trump’s comments, Yellen’s term will not be extended beyond January 2018 under a Trump Presidency. In any event, Yellen may choose to leave after her term ends under a Clinton Presidency, so some change in approach is possible regardless of who wins. Given Yellen is regarded as on the dovish end of the policy spectrum, this consideration could play USD positive, but it is too soon to be a major factor.
2. Fiscal policy:
On fiscal policy, there is a significant probability of some fiscal stimulus early into the new President’s term, whoever is President, even with a divisive Congressional backdrop. The last three Presidents all pursued some form of fiscal stimulus at the start of their first term under varying circumstances. Increased infrastructure investment seems to be a common theme in the Trump and Clinton proposals, and has some cross party support. The fiscal-monetary policy mix is then apt to be more USD friendly post-election. This is much more relevant for thinking about 2017 than 2016.
Before then, assuming the race is reasonably tight, we will be worrying about trade disputes, and a US-led increase in global risk.
3. Trade:
These stresses have predictable FX consequences in some areas - the MXN is very vulnerable – but are less predictable in terms of impact for other currencies, including for EM Asia and CNY. EM Asia will be subject to negative trade concerns, but particularly for those countries that are intervening to stop appreciation they will be under more pressure to let their currencies appreciate. All countries on the US Treasury monitoring list spring to mind, with Taiwan and Korea in EM Asia in the spotlight based on C/A surpluses and intervention patterns. Presumably, under Trump, the US Treasury monitoring mechanism will be applied with a heavier hand. This on the surface should be good for the KRW and TWD. However, watch-out for an unpredictable China impact that could dominate all other factors. Pushing China to tolerate a more market determined exchange rate, will likely lead to a weaker CNY with negative implications for all of EM Asia FX.
How any Trump administration navigates this ‘contradiction’ between a country running a large bilateral surplus with the US, but market pressure for their currency to weaken, will be crucial. If Trump’s negotiations with China roil markets, the dominant macro story will quickly shift to a China led risk-off move, with very negative consequences for all commodity and EM FX, with the USD strengthening against most currencies, outside the other G4 currencies. A US led increase in global uncertainty would undercut the Fed policy tightening cycle, and act as a USD negative factor versus the likes of JPY, CHF, and EUR.
4. Key appointments:
Who Trump and Clinton lean towards as Treasury Secretary is very important. The unspoken flip side of comments that countries are manipulating their currencies weaker, is that the USD is too strong. The last time the US went down the path of using the exchange rate as a trade tool was with Treasury Secretary Lloyd Bentsen in the first couple of years of the Bill Clinton administration - a period when the US was constantly talking USD/JPY lower. Any sign that we are going down that path could put the USD under some pressure versus a few select currencies, including the yen. Trump would further close the exchange rate as one key channel through which unorthodox policy works, potentially compounding concerns about unorthodox policy efficacy, with negative risk implications.
5. Other:
However, even here pre-election USD negative implications of the trade discussion, will be partly offset by the USD positive post-election thinking on the monetary/fiscal mix, and other USD positive micro issues like a 2005 HIA equivalent repatriation of US corporate tax holdings from abroad (even if most these assets are in USD already). Considerations of a possibly more ‘business friendly’ administration could also be an important USD positive, but again as a 2017 theme.
6. Conclusions:
As the election debate heats up, this should play EMFX and commodity currency negative versus G3. To the extent that US politics is seen leading to a rise in global uncertainties, this should be mildly USD negative versus the JPY, CHF and EUR into the election, but the fiscal-monetary policy mix thereafter could encourage the resumption of the stronger USD theme in 2017. The wild-card in the longer-term 2017 calculus for G3, is the extent to which trade negotiations roil China’s markets, which would add negative pressure to EM and commodity currencies, while the EUR and JPY would likely hold their own versus the USD.