Monday, November 7, 2016

A Trump Win Could Sink The Dollar

Kneejerk Trump-slump may reverse in long term, strategists say; Consensus shows Clinton White House victory would spark rally.

November 7, 2016

The dollar will plunge toward the weakest since 2013 against the yen in the wake of an election victory for Donald Trump, the most-accurate currency forecasters say.

Within 24 hours, the greenback will drop to 100 yen or lower if Trump is voted president, according to the majority of the top 10 foreign-exchange analysts in Bloomberg’s third-quarter rankings. If Hillary Clinton wins, they see an advance. The dollar surged 1.1 percent to 104.25 yen as of 1:29 p.m. in Tokyo on Monday after the Federal Bureau of Investigation said it maintains the view Clinton’s handling of her e-mails wasn’t a crime.

The survey of leading currency analysts shows that even the biggest and most liquid global markets face sharp swings and volatility in the aftermath of Tuesday’s vote, with repercussions set to spread around the world. Democrat Clinton’s lead over Republican challenger Trump has narrowed in the past week, according to polling, raising the stakes in foreign-exchange markets, because Trump has promised to tear up existing U.S. trade agreements and is seen by investors as less predictable than his Democratic rival.

“Currency markets are long the dollar and not positioned for a Trump victory, so there may be panic selling of dollar and buying of safe-haven currencies,” said Scott Petruska, a senior adviser in Newton, Massachusetts at SVB Financial Group, the sixth most-accurate currency forecaster in a Bloomberg analysis. He sees the dollar falling to 99.50 yen 24 hours after a Trump win, while the greenback would rally to 105.25 on a Clinton victory.

Investors got a fresh reminder of the market’s volatility when the FBI’s director said in a letter on Sunday in the U.S. that the bureau was sticking with its July conclusion that Clinton’s handling of her e-mails as Secretary of State wasn’t a crime. The FBI’s James Comey had informed Congress in a letter on Oct. 28 that the bureau was examining new e-mails potentially related to its investigation, roiling the presidential race.

The Mexican peso promptly climbed, as did the Canadian dollar. The greenback advanced 0.5 percent to $1.1083 per euro.

Bloomberg asked the 10 most-accurate currency forecasters from its quarterly assessment to predict where the dollar would trade against the yen and the euro 24 hours and seven days after the election. Among the top 10, only Wells Fargo & Co. declined to provide election-based forecasts.

The one-day reaction to a Trump triumph would weaken the dollar to $1.1328 per euro from $1.1141 on Nov. 4, while a Clinton victory would see the greenback gain to $1.1006, according to the average of nine estimates. The seven-day results showed a Trump win would weaken the dollar to 99.06 yen and $1.1389 per euro. A Clinton victory would boost the greenback to 104.78 yen and leave it little changed at $1.1014 per euro during the same time period.

In terms of the immediate market reaction, a win for the Democratic nominee would lead investors to pivot their focus back to the economy and monetary policy, said David Kohl, the Frankfurt-based head of foreign-exchange research at Julius Baer Group Ltd., the No. 1 forecaster in the survey. High on the list would be the the Dec. 13-14 Federal Reserve meeting, in which futures traders are currently pricing in about a 76 percent chance of an interest-rate increase.

There will likely be “no reaction on a short-term horizon," Kohl said. "Over the longer term, focus will shift much faster to the Fed. Under Clinton, politics will not be an issue for financial markets for a long time.”

If Trump wins, dollar bulls may still come out on top if they can stomach short-term losses.

While all analysts forecast the dollar will suffer in the immediate aftermath of a Trump win, Bank Julius Baer and Rand Merchant Bank, the No. 2 forecaster, said the U.S. currency would rally in the long run because the Republican candidate’s policies, including pledges to cut taxes and spend as much as $500 billion on infrastructure programs, are inflationary, which would lead to higher U.S. interest rates and bolster the dollar’s relative allure.

To them, the crux of forecasting lies in pinpointing how long it’ll take for investor angst to dissipate, and figuring out when the $5.1 trillion-per-day global currency market starts pricing in Trump’s economic agenda.

“Forecasts are always difficult -- you’re basically trapped between fundamentals and momentum,” Kohl said. “We have a call out and I stand quite firmly behind it -- that the dollar would actually profit from a Trump victory, but this will not play out in 24 hours and also not in a week.”

Kohl predicts the dollar to gain 12 percent to 115 yen, and as much as 7 percent to $1.04 against the euro, by June 2017 if Trump becomes president. If Clinton’s elected, he said the dollar will appreciate to 111 yen and $1.07 versus the common currency in the span.

Trump’s plan to lure American multinationals such as Apple Inc. and Microsoft Corp. to bring billions of offshore cash home would ultimately drive demand for the dollar, said Rand Merchant Bank’s John Cairns. The candidate’s promise to expand fiscal policy through tax cuts will boost economic growth and potentially lead to higher interest rates, according to the Johannesburg-based strategist.

“The dollar should logically strengthen on a Trump victory," Cairns said. "He’s more likely to approve a tax holiday, which would see significant capital return to the U.S."

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