Currencies are the most political of financial assets.
So even before the new president takes the reins of power, one thing is clear: Under Donald Trump‘s regime, the dollar will be far more sensitive to the vicissitudes of the presidency than at any time since the Reagan Era.
After the election of Mr. Trump, the greenback staged one of its strongest rallies in decades. But it has started to retrace the move since the beginning of the year, with USD/JPY lower by more than 500 pips off the highs.
Part of the reason for the move is simply a normal correction after such a strong rally.
But perhaps the single biggest factor that has kneecapped the buck were comments overnight by Mr. Trump regarding the Border Adjustment Tax. The BAT attempted to tax imports manufactured from abroad while exempting business exports from taxation. Mr. Trump rightly criticized the bill as “too complex” and as open to manipulation and abuse by the corporate sector.
|When the president speaks, the U.S. dollar market listens.|
Taking a page from Ronald Reagan — who always tried to craft the simplest possible policy rules — Mr. Trump suggested, in an interview with The Wall Street Journal, that he preferred to see a lowering of corporate tax to 15%.
Although many critics have pointed out that such a reduction would be revenue negative, there is little doubt that it would be viewed with great enthusiasm by the financial markets. And will very likely trigger massive capital inflow into dollar–denominated assets as a result.
I have long argued that the Trump rally was predicated on the idea that the new president should focus all his energies on economic reform while sidestepping the more radical points of his social agenda.
However, that won‘t be easy: Even The Wall Street Journal made a note over the weekend that “the apparent divide between the incoming president and Congressional allies underscores the challenge Mr. Trump will face advancing his agenda, and in particular his planned tax cuts. The transition team and House leaders have been talking but they clearly have some details and agreements to work out.“
So, whether the Trump trade (long equities, short bonds, long the U.S. dollar) has legs really depends on who wins the first 100 days in office. If Mr. Trump can get his agenda through Congress, the Trump trade revives. If on the other hand, there are bumps in the road, it may be time to add a bit more caution.