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Global Trade Policy Will Supplant Monetary Policy, Catalyze Risk Trends

Global Trade Policy Will Supplant Monetary Policy, Catalyze Risk Trends

John Kicklighter, Chief Strategist

Talking Points:

  • Trade policy is quickly turning into the kind of key fundamental theme that can dictate global financial weather patterns
  • Incoming US President Donald Trump brings a decidedly clear agenda of disrupting trade that disadvantages the US
  • There has been a build in anti-trade pressure for some time, and this driver will rival central bank and risk influence

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On Friday, Donald Trump was sworn in as the next President of the United States; and he brings with him anticipation of policy that will significantly curb global trade. While this policy shift for the world's largest economy is understandably drawing the greatest amount of attention - both for the proximity of the inauguration and the size of the country under consideration - but it is hardly the origination of the swell of anti-trade sentiment and policy. The United Kingdom's Brexit (a vote to withdrawal from the European Union) was a definitive move to withdrawal from globalization. Europe's financial crisis which peaked from 2010 to 2012 set in motion a rise in anti-EU and anti-Euro sentiment from members like Greece that felt the negative effects of being in a trade union particularly acutely. And, then there is China which has engaged in certain version of what is now spreading for arguably decades.

What the United States' engagement in the anti-trade evolution represents is an escalation of a global theme to now encompass the biggest player - one that can single-handedly hobble collaborative economic growth the world over. With the US just starting down the path of its disconnect, the pressure and scope are only beginning. While this may not be a new theme, it has certainly not exacted its full influence over the market. Compare that to a relative monetary policy theme which has been a dominant driver for the major currencies and even capital market assets for some years. Compared to the slow pace of Fed hikes through 2017 and the faltering effectiveness of extreme stimulus programs (just look at the lack of influence the ECB and BoJ stimulus efforts now afford), global trade developments may take the responsibility for far more of the market's development moving forward.

There is a third facet that the anti-trade measure will interact with: risk trends. Sentiment's influence to rush towards higher returns or flee extreme risk is elemental. If complacency were shed, there is little doubt that the bearings and posibilities for global trade will be an afterthought. That said, we have yet to see years of growing exposure finally give way. Yet, perhaps this is the financial development that finally triggers the speculative collapse. In the short-term, consumer economies that pursue protectionist efforts can benefit, while those that are trade dependent will suffer. The likes of Japan, Switzerland, China and broader emerging markets face the most immediate risk. Long-term, there are no winners. Liquidity thins, volatility rises and the appetite for risk taking retreats. Growth slows and the buffers for crises disappear. The rise of anti-trade policies and what it means for our market and trading is the focus of this weekend Strategy Video.

Global Trade Policy Will Supplant Monetary Policy, Catalyze Risk Trends

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.