Talking Points:
- A dollar tumble Tuesday followed remarks made by President-elect Donald Trump that the currency was too high
- Unexpected risks to global trade are rising popping up more frequently as the channels for risk grow increasingly numerous
- Trump's policy-related tweets, Brexit speeches, retaliatory China trade calls and more are more prevalent as trade struggles
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The incoming US President has proven arguably the most productive drivers for the US Dollar since the outcome of the US election in early November. However Donald Trump is hardly the only catalyst outside traditional fundamentals and the Dollar certainly isn't the only currency that has had its course altered by trade threats. Navigating the FX and broader financial markets nowadays requires a healthy appreciation of the active threats that increasingly fall outside of our standard channel of critical thematic influence: risk trends, divergent monetary policy and traditional economic performance. Barriers to global trade and the relationships they support is quickly pushing to the forefront. What's more, given the method for developments on this front; we may be facing a far more turbulent and unpredictable trading environment through the immediate future.
Over the past days, weeks and months; one of the most prominent threats to a market-determined FX market seems to be the incoming US President. After Donald Trump unexpectedly won the election in early November, the market started to interpret his policy views on the campaign trail as a bullish driver for the Dollar. Fiscal stimulus, tax cuts and a border tax in response to perceived exchange rate manipulation was read as a speculative lift for local assets as well as an accelerant for Fed hikes. However, these factors followed a secondary view of what would motivate the currency. A direct assessment of an over-extended Dollar this past session circumvented the knock on considerations. Primary objectives were seen to have shifted and the outlook for volatility behind the Dollar was immediately leveraged.
While the currency assessment by the very vocal and bombastic US President-elect represents a clear influence on exchange rates, this rather new influence is hardly the only example pressure on trade and currency bearings in the global system. Before the Bank of Japan turned up the volume on its massive open-ended stimulus, officials remarked that they were targeting the Yen explicitly in an effort to confer a trade advantage - a statement that was quickly retracted. The ECB connected its monetary policy efforts to EUR/USD testing 1.4000 in 2014. And, the Brexit is a social and economic decision that has clear influence over the circulation of global trade. These risks to trade and market-derived exchange rates grows increasingly common. Traders need to account for the influence this theme has and the erratic nature its impact takes. We discuss this new facet of the market in today's Strategy Video.
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