As the Asian session was just opening, the news of Donald Trump’s decisive victory pushed the dollar higher against most major trading partners, especially against the yen.
Then, later in the night, when Ted Cruz dropped out of the race, the greenback pushed even higher.
For most investors, the notion that the Donald is good for the dollar may seem bizarre. This is, after all, the man who sent the media and conventional economists into outbursts of rage when he suggested that the U.S. government should negotiate its debt with creditors.
In all fairness to Trump, that wasn’t really what he said. He was simply musing about the prospect of using “on-the-run” bonds (those freshly issued by the Treasury) to pay off the “off-the-run” bonds (those that have been circulating in the secondary market for a while).
The idea is that off-the-run bonds trade at a discount to on-the-run bonds, kind of like the discount that occurs when a brand-new car is driven off the lot. The product is essentially the same, but now it’s worth a lot less.
|The U.S. presidential race could have a big impact on the dollar/yuan rate.|
In any case, Trump’s ruminations were not even that unorthodox. The U.S. Treasury considered such a plan as early as 1999, when the U.S. was running budget surpluses and when the government was thinking about reducing the face amount of U.S. debt. Still, the kernel behind Trump’s idea does imply that he is betting on the deterioration of U.S. credit as a way to squeeze the creditors.
So why then would the dollar rally on the idea of a Trump win? The reason actually lies elsewhere. One of Trump’s strongest and most committed policy stances is that the U.S.-China trade relationship should be seriously re-examined.
His take-no-prisoners stance against the Chinese could actually become the key stress point in the global economy. China is already hurting. After spending more than a trillion dollars in additional credit, the Chinese economy continues to slow. In fact, imports have fallen by double-digits on a year-over-year basis for the first four months of 2016.
|“Now that a Trump presidency looks like a real possibility, the prospect of a yuan crash has become a much bigger risk.”|
Despite their typical bravado, the Chinese leadership is clearly worried. And what they fear most is a rapid devaluation of the yuan. The country is already running a debt-to-GDP ratio of 280%. And despite $3 trillion in reserves, Chinese policymakers are very concerned that capital outflows could quickly deplete their war chest.
For the past few months, mollified by the dovish stance of the Fed and the still uncertain outcome of the Republican primaries, the yuan stabilized. But now that a Trump presidency looks like a real possibility, the prospect of a yuan crash has become a much bigger risk.
Trump, of course, is the master of seizing his opponents’ weakness and will likely be much more hardnosed with the Chinese than Hillary Clinton would be. Little wonder, then, that the yuan has fallen to its weakest reading against the buck in more than two months. The currency markets are beginning to understand just how the game will be played.
Although dollar strength may be viewed as positive from a political point of view, economically it could wreak havoc on the markets.
U.S. equity markets are American in name only. Many Dow Jones-listed companies earn as much as 70% of their revenue offshore. A strengthening dollar could depress earnings for several quarters forward and cause a correction in stocks of 20% or more.
That’s why for equity investors this summer the most important number to follow will not be the market’s P/E ratio, but rather the dollar’s exchange rate and Trump’s presidential poll readings. As the dollar starts to rise along with Trump’s poll numbers, stocks could fall hard.
The results are in, and while Bernie Sanders defeated Hillary Clinton in West Virginia on Tuesday night, he’s still a long shot in a win for the candidacy. Meanwhile, Donald Trump captured both West Virginia and Nebraska, and he continues on track as the presumptive Republican nominee. Among Democrats in West Virginia, only 27% said they want a candidate who continues Obama’s policies. In both states, more than 90% of Republican voters said they were “angry” or “dissatisfied” with the federal government. This shows that both sides of the race are indeed hungry for a change.
Due to the backdrop of the Olympics and the upcoming elections, this summer is bound to be what Ricardo Marques, a vice president from Budweiser, calls “maybe the most American summer ever.” So Budweiser is going to potentially absurd branding extremes by renaming its beer “America” for the summer and through the November elections. Summer is traditionally peak beer-selling season, so this could prove to be a smart marketing move. Time will tell.
Toyota Motor Corp. forecast a bigger-than-expected 35% tumble in net profit for the current year due to the sharp appreciation of the yen, ending three straight years of record profits driven in part by a weak currency. The Japanese automaker said profit for the year ending in March 2017 will fall to 1.5 trillion yen ($13.81 billion) from 2.31 trillion yen in the prior year, far short of the average 2.25 trillion yen for the current year estimated by 28 analysts, according to Thomson Reuters.
JetBlue Airways leads the pack, at least when it comes to customer satisfaction with airlines. That’s according to the J.D Power and Associates 2016 North America Airline Satisfaction Study, which JetBlue dominated, coming in first for the 11th consecutive year. Do you agree?
What are your thoughts on the recent primary results? Do you share the views of your fellow Americans who want to see a drastic change in Washington? Are Toyota’s recent earnings results a harbinger of what’s to come in the auto industry? Is JetBlue your favorite airline? We welcome your thoughts below.
The Money and Markets team