Why Foreign Exchange Markets Quickly Warmed to President Trump

US Dollar recovers

Exchange rate moves following the Trump victory confirm traders are not as averse to the idea of a Trump presidency as they lead us to believe in the run-up to the momentus vote.

The US Dollar was expected to fall on a Trump victory and as the outsider shocked markets by heading for victory so the currency obliged.

High-risk stocks, commodities and commodity currencies followed suit in what appeared to be a repeat of the Brexit trade.

However, the subsequent recovery suggests this time is different, or at the very least, the post-Brexit retracement has occurred a lot quicker as markets anticipate the inevitable.

"Seemingly everyone predicted financial apocalypse on the back of this event, but canny investors have worked out that the sun will still come up tomorrow even after Donald’s win, although looking at the weather in London that seems hard to believe," says Chris Beauchamp at IG.

"While Trump’s controversial rhetoric with regards to immigrants and Muslims stole the headlines, he is predictably very pro-business, promising lower income and corporation taxes," adds the analyst.

The Euro could be considered the big loser of the Trump victory, which is a complete flip on the position analysts took walking into the event.

The Euro is a large funder of US stock markets as it is now so cheap to borrow.

Therefore, when US markets are down the Euro tends to benefit from repatriation flows, and when markets are up so the Euro falls as global investors buy Dollars to fund stock purchases.

The US Dollar and Sterling have both benefited from the Euro's slippage.

Other winners of this dynamic have been commodity currencies such as the Australian Dollar which would benefit from any lift in commodity prices that an accelerating US economy presents. 

Five Reasons why the markets recovered from the Trump vote so quickly

Analysts at Capital Economics have given five reasons to explain the markets rapid about-turn on Trump.

1) The precedents set by Brexit. The shock of the UK’s vote in favour of leaving the EU meant that investors may have been better prepared for a surprise outcome this time and also quicker to re-position for a swift recovery.

2) Trump’s gracious acceptance speech has encouraged hopes that he will moderate his more extreme positions when actually in office.

"We argued in the wake of the EU referendum that nothing had changed immediately as a result of the Brexit vote and wouldn’t for a while. That line is arguably stronger in this case. Brexit means Brexit at some point. Trump doesn’t inevitably change anything. Indeed, it is fair to ask “does Trump mean Trump?” say Capital Economics in a note to clients.

3) There are hopes that the checks and balances in the US political system (including opposition from more fiscally-conservative Republicans) will prevent him from doing that much too radical anyway in terms of domestic policy, especially fiscal policy.

4) Worries about a trade war may have been tempered by the belief that the tide had turned against globalisation anyway and that a Trump presidency may not make much difference. Admittedly, the chances of the US signing any new trade deals are now even smaller (except perhaps for a bilateral agreement with the UK).

"But we doubt that Trump will follow through fully on his threats to impose large trade tariffs on Mexico or China, or to withdraw from existing deals (even though he does have a lot of leeway to do so without congressional approval," say Capital Economics.

5) The economic backdrop for asset markets is generally improving. Markets seem confident that underlying fundamentals are sound, helped by recent better economic news from the US and elsewhere, especially China.

Stock Markets in Remarkable Surge

The S&P 500 embarked on a remarkable recovery as traders quickly decided Trump = good for business.

The S&P 500 managed to finish in the green, despite being down 5% earlier in the session ensuring the greatest reversal seen in the index since the 2008 financial crisis.

The standout aspect of Trump’s victory speech is his commitment to infrastructure spending and to double GDP growth.

The promise to spend on schools, highways, inner cities etc would represent a massive Keynesian-style economic stimulus that one would not traditionally link to a party associated with fiscal conservatism.

Clinton planned to spend $275 billion over five years with $250 billion of that total being in direct public investment in roads, bridges, airports, and clean energy.

A further $25 billion would fund a national infrastructure bank.

Clinton has stated that these investments would be one of the two major initiatives of her first 100 days in office.

Trump said he wants to double the amount of infrastructure spending proposed by his Democratic opponent.

Yet, the tone of resurrection that such programmes offer certainly resonates with his voters who are desperate for change and a renaissance of the “Great America.”

Stimulus of such a magnitude implies the potential for higher economic growth which markets will embrace.

In addition to increased spending, markets are particularly looking forward to a new era of low tax.

This includes the slashing of corporation tax to 15% from 35% with a one-off 15% tax for those companies that look to repatriate foreign earnings.

"If implemented, the candidate's tax and spending policies could boost growth over the medium-term horizon. Additionally, corporate tax reform could aid growth. These tax proposals may be seen as having a better chance of being implemented than some of President-elect Trump's other proposals as they hue closely to Republican House tax proposals made in the past," says Drew T. Matus at UBS.

The markets are waking up to the chance of a growth driven economic period for the US.