Briefing highlights
- Currency winners and losers
- Canada posts December trade surplus
- Manulife drops nicotine testing
- GM profit hit by currency losses
‘Trumpflation, Trumpprehension or Trumpanic’
Elsa Lignos has taken a unique and interesting look at currency market scenarios under the new Trump administration.
And what savvy investors might do about them.
Ms. Lignos, Royal Bank of Canada’s head of foreign-exchange strategy in London, laid out three scenarios in a recent report, tongue-in-cheek in their labels but real in their potential: “Trumpflation, Trumpprehension or Trumpanic.”
The first is what everyone had assumed when Donald Trump won the presidency in early November, that his fiscal and economic policies would boost inflation. That has eased as Mr. Trump’s initial moves have tended to trade threats and barring people from largely Muslim countries for fear they could be terrorists.
The third, Trumpanic, suggests geopolitical threats and risk of a trade war, which, given Mr. Trump’s first two weeks in office, is anything but far-fetched.
And the second, Trumpprehension, means “nothing meaningful” actually happens and “the uncertainty and lack of policy action” lead the U.S. central bank’s policy-making Federal Open Market Committee, or FOMC, to raise interest rates no more than twice this year, which markets already expect.
Before getting into it all, it’s important to note Ms. Lignos believes that markets won’t see just one scenario, so you have to pick and choose which policies you expect to win out and, thus, the mix you expect.
Her main point, she said in an interview, is that there has been a wide range of contradictory policies, but most would lead to a stronger U.S. dollar if they come to pass.
“Contrary to the President’s own intentions, his policies are likely to be USD-positive,” Ms. Lignos said in her report, referring to the U.S. dollar by its symbol.
“But the best currencies to short on the other side depend on which policies dominate.”
Ms. Lignos expects the Swiss franc, the euro, the pound and the yen would lose under Trumpflation.
“Trumpflation is based on fiscal stimulus (largely expected to come through tax cuts, though with some potential for increased infrastructure spending) and deregulation,” she said in her report.
“Easy fiscal policy leads to tighter monetary policy, and with only some FOMC members factoring in fiscal easing expectations so far, that would mean faster-than-expected hikes from the Fed and higher USD,” she added.
“On the other side of the trade, [the yen] remains one of the most highly leveraged currencies to the U.S. rate cycle and loses if the Fed hikes aggressively.”
Also out there are proposals for a sweeping tax overhaul. Among the potential measures is a repatriation tax, which Ms. Lignos said would whack the franc, and a so-called border-adjustment tax, which would slam the loonie.
The latter is not one of Mr. Trump’s policies. It’s being pushed by congressional Republicans, though observers believe it may well see the light of day.
Under Trumpanic, the euro, Swiss franc and yen would be the “relative winners.” The Canadian and Australian dollars – CAD and AUD – would lose out.
“Both are strong risk-on proxies,” Ms. Lignos said.
“CAD also loses if its direct trade links to the U.S. are hit while AUD loses if iron ore and coal turn lower,” she added.
“USD still benefits – as the world’s consumer and a relatively closed economy, it is a relative winner in a trade war (though the global growth pie shrinks in total) and the inflationary impact of tariffs could also force the Fed’s hand on hikes, particularly if the economy remains near full employment.”
Worst for the U.S. dollar would be Trumpprehension, Ms. Lignos said.
‘Mixed blessing’
Canada’s sudden good fortune on the trade front can be a “mixed blessing,” as Bank of Montreal points out.
The latest numbers from Statistics Canada show the country’s trade surplus narrowing in December to $923-million from November’s revised $1-billion.
Those are back-to-back surpluses that come amid the Trump administrations focus on trade, just as America’s deficit rings in at more than $500-billion (U.S.) for 2016, the fattest since 2012.
According to Statistics Canada, exports rose 0.8 per cent, but that was due to higher prices, while imports rose 1 per cent.
And where just the U.S. is concerned, Canada’s trade surplus narrowed to $4.4-billion from $4.7-billion in November.
For the year, Canada rang up a deficit of $23-billion.
“Ironically, while the re-emergence of a trade surplus would normally be welcomed with open arms by Canadian policy makers, this one arrives as a bit of a mixed blessing,” BMO chief economist Douglas Porter said before the latest numbers, adding that “with the new administration’s laser-like focus on trade imbalances, it’s probably best to lay low these days.”