Fears of Donald Trump's isolationist agenda could be an emerging risk for the dollar in 2016.
Analysts at Credit Suisse have downgraded their outlook for the dollar in 2016 and communicated the emergence of a potential new threat to the currency - Donald Trump could be the next big headache for dollar bulls in 2016.
In fact, the Trump factor could already be eating into the Dollar's value
In a research note by Credit Suisse’s Alvise Marino et al, it is argued that 'Trumpxit' could explain why the dollar has weakened since Super Tuesday despite a slew of positive macro-economic data.
'Trumpxit' references the term 'Brexit' which, in currency terms, is that weakness in the pound inspired by a potential vote by the UK to leave the European Union.
Brexit means the pound is trading well below where it should be based on fundamental observations; this gives an idea of the impact a Trump Presidency, or the fear of, could have on the dollar's value.
On 'Super Tuesday' Donald Trump and Hillary Clinton came out ahead of the opposition as the most likely nominees to run for president:
“Super Tuesday results highlighted more strongly the possibility that anti-establishment candidates running on a platform that can be judged relatively hostile to existing US trade and financial arrangements are genuine contenders for the US presidency.”
The impact of Trumpxit combined with: “the wider USD story also more challenged near term,” is likely to witness an “extension” of current trends, “with AUDUSD reaching 0.78 and USDCAD 1.30 on a 3-month horizon.” As well as a gain for wider EM and LATAM currencies against the dollar.
Pound Sterling Live highlighted the possibility of a ‘presidential effect’ impacting on the dollar earlier in the year after the currency fell following the win for the two mainstream candidates Hilary Clinton and Ted Cruz in the Iowa caucuses.
In that report we concluded Trumpxit would have a positive impact on the dollar, because Trump’s protectionist policies would probably lead to a fall in foreign imports and a reduction in the trade deficit.
Our analysis was limited to the narrow impact of anti-establishment policies on economic factors directly impacting on FX (without regard for a potential foreign reposte), Credit Suisse viewed them as “toxic” for the more general health of the U.S economy, and because of the large share of US assets now owned by foreign investors.
US More Vulnerable
The U.S economy is relatively more at risk of a Trumpxit because of the higher levels of foreign interest in its assets.
Marion et all note that in the last 7 years the country saw a steady rise in interest in its assets:
“The US has seen in the past 7 years a revival in foreign interest in its assets. This makes it more vulnerable to concerns that spur selling or hedging.”
Foreign investors might start to sell their US assets on masse, if a Trump regime brought in anti-social trading policies which ostracized the country from the international community:
“Also, in the past, we have highlighted the ongoing vulnerability of the USD to funding and net international investment position realities.”
China, for example, has a huge reserve of U.S Treasuries, which it could easily sell, starting a rout in the bond market, were Trump and Sander’s anti-Chinese rhetoric to force Beijing’s hand.
In the short-term there are other factors weighing on the dollar, including the poor outlook from exports, which according to Q4 GDP and February’s ISM data have deteriorated:
These plus the Trumxit risk make the dollar a sell rather than buy candidate.
Commodity Currency Rise Only Temporary
For commodity currencies such as the Aussie and the Loonie (CAD), Credit Suisse’s analysis leads to the conclusion that their current up-trends versus the greenback will probably extend further.
They see further slack for upside coming from the markets miss-perception that the Reserve Bank of Australia (RBA) and Bank of Canada (BOC) will cut interest rates sometime this year:
“There is still room to run because markets continue to price in some chance of rate cuts in countries like Australia (one 25bp rate cut still priced for 2016) and Canada this year despite broadly acceptable growth and inflation data this year as well as an underlying current of strong house price growth.”
However, they argue that should AUD or CAD appreciate too much the RBA and BOC will in the end have to enact further easing because low exchange rates are key to facilitating the economic metamorphosis from resource to service based economies that both countries are trying to achieve:
“As the RBA's Lowe made clear in a speech on 8 Mar, a key reason for better-than-expected rebalancing outcomes in Australia has been the soft AUD which has boosted industries ranging from tourism to education to agriculture. A stronger AUD would risk nipping this in the bud very quickly. Lowe also pointed out that housing construction has had a big impact in replacing mining investment as a source of growth.”
For this reason the analysts at Creidt Suisse also have a sell recommendation should AUD/USD reach 0.78 and a buy at 1.30 USD/CAD.