It’s official. Donald Trump is now the 45th President of the United States of America. So what better time to explore how a Trump presidency will affect USD?
In the following sections, I’ll take a look at his key policy proposals and how they could impact the Fed’s monetary policy.
Why did Donald Trump win?
Before exploring President Trump’s policy proposals, let’s clarify the reasons behind his election.
Commentators originally dismissed Trump as a protest candidate, so it’s fair to say that the real estate tycoon has exceeded expectations.
Hillary Clinton was the clear favourite heading into November’s election. But the actual result didn’t surprise me at all.
Why? Because Trump represents a phenomenon which is spreading across the world. Namely a kickback against globalisation.
Brexit is another example of this. People across Europe and the US are worried about their jobs and standards of living. It’s why protectionism will be a major theme of geopolitics over the next decade. This in turn will have an impact on our trading decisions.
Now the real work begins for Trump and his administration. As they attempt to ‘Make America Great Again’, these are the policy areas that I believe could impact USD.
Repealing the Affordable Care Act (ACA) is a top priority of the Trump administration. In fact, the day after his inauguration, Donald Trump signed an executive order to start this process.
However, no replacement for ACA (also known as ObamaCare) is currently ready. Instead, there are concerns that a Republican alternative could add $9.7 trillion dollars of new Federal debt over the next decade.
These concerns were expressed by Republican Senator Rand Paul at the beginning of January.
What will the first order of business be for the new Republican majority? To pass a budget that never balances. pic.twitter.com/DEBquJvK7P
— Senator Rand Paul (@RandPaul) 4 January 2017
The metric that matters to traders here is the Federal debt. Its level in relation to GDP can have an impact on USD price.
Understanding Federal Debt
The Federal debt is the amount of money that the US government owes. The public own a large portion of this debt and comes in the form of government bonds, bills and notes (known as Treasury Securities in the US).
Most developed economies have high levels of national debt because governments need to borrow money to support economic growth. However, too much debt can cause demand for their debt securities to fall. A shortfall in demand also weakens the value of the respective currency.
Below is a chart showing 10 Year Treasury Bond Yields and the price of USD. You should notice that they are positively correlated. Bond yields are indicative of the demand for Treasury Securities (e.g. higher yield, higher demand).
Our task as Forex traders is to monitor the demand for Treasury Securities.
A significant increase in the Federal debt could cause USD to weaken. My anticipation is that a Republican controlled Senate and Congress will not allow the Federal debt to balloon. However, traders should keep a close eye on healthcare developments.
Jobs & Growth
Creating jobs was one of Trump’s major campaign promises. However, his administration is yet to publish specific details on how they will achieve this.
New web pages from whitehouse.gov reveal that Trump wants to create 25 million new American jobs over the next decade. In addition, he wants GDP to hit 4% annually. To keep these goals in context, the Obama administration added 15.8 million jobs since 2010.
A simplified tax code has been cited as one way of encouraging job creation. In particular, Trump wants to encourage big businesses to manufacture in the US by dramatically lowering corporate taxes (from 35% to 15%). The US currently has one of the highest corporate tax rates.
However, there’s an underlying problem with Trump’s tax reforms. An independent analysis of Trump’s plan suggested that it could add $7 billion to the Federal debt. As I mentioned above, an increase in debt could weaken USD, so it’s important to monitor.
Trump also wants to strip back regulation that can make it hard for businesses to operate. This will likely include provisions that protect the environment and keep Wall Street in check.
The above policies are clearly pro-business. They will encourage the world’s biggest companies to move their operations into the US, which will create new jobs. Predicting an exact number is difficult, but it’s clear to see that investors like the pro-business rhetoric.
In the week after Trump’s election, over $1.1 trillion global bonds were sold. It was a significant sell-off and a clear sign that investors are expecting inflationary policies and further interest rate increases. Why? It’s because of Trump’s plan to borrow money and implement pro-business policies.
Remember, central banks control the rate of inflation by hiking interest rates. My video below will help you understand why interest rates are important. Interest rate hikes strengthen the respective currency – and I think this is what we can expect for USD in 2017.
During the campaign, Trump has been extremely vocal about getting a better for the US when it comes to trade. Since his election, he hasn’t toned the language down. For example, he tweeted Toyota directly, threatening high export tariffs if they manufactured cars at their Mexico plant.
Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.
— Donald J. Trump (@realDonaldTrump) 5 January 2017
These moves are clearly intended to encourage automotive giants to manufacture within the US – a tactic which has had some success. At the beginning of January, Fiat Chrysler announced that it would be making a $1 billion investment in the US to manufacture its cars. General Motors has also pledged to invest the same amount into its manufacturing operations.
However, imposing border taxes of 35% on cars imported into the US could be an act of self-harm. The US could hurt its own export markets should it become too protectionist. So while big business might find low US tax rates attractive, this could be offset by high export costs. This is an area which could hurt US economic growth, weakening USD in the process.
We don’t yet know how Trump will renegotiate US trade deals. So this a policy area which traders should closely monitor.
How A Trump Presidency Will Affect USD
The US dollar was already the strongest major currency before Donald Trump’s inauguration. Steady economic growth prompted the Federal Reserve to raise interest rates for the first time in December 2016.
Before Trump’s inauguration, further hikes were expected from the Federal Reserve for 2017. I think his administration’s inflationary policies make this even more likely. This means I expect USD to strengthen in the months ahead.
However, there are caveats to this prediction. The first is the level of Federal debt as Trump’s policies take hold. Should it increase, there will be downward pressure on the US dollar.
Secondly, an overly protectionist trade policy from the US could hurt domestic economic growth. This coming to pass is entirely plausible considering the rhetoric from Trump.
Hopefully, this article gives you some useful insights into how a Trump presidency will affect USD. The next challenge is to use this information to place some profitable trades. If you need help doing this, you should join my Facebook Group.
This is where I share weekly risk event videos and answer questions from our community of Forex traders. By joining, you’ll get specific trading ideas for USD and other major currency pairs.
I’m interested to hear your trading ideas for USD in 2017. Please share your thoughts in the comments below and I’ll do my best to write a reply.