Dear FX traders, here are your new parameters to monitor for currency fluctuations
It seems under new administration of one Donald J Trump; things are going to be done differently and with a lot quicker paces. Currency exchange is one of them. It used to be enough to just take a look at Federal Reserve minutes and USA jobs numbers and just take into account the season and market’s cycle and wolah, you can get some idea of where dollar index would go.
Probably not anymore!
Because, the new president of the United State is going to do huge thing and very quickly.
Things like what?
Well… Here are couple of major announced plans that is going to change the way international trade and currencies exchanges will work (for sure…. Ummmm, probably)
1- Trade war and abandonment of previous trade treaties. As an example, the Mexican peso has been on a seesaw with each one of president Trump’s twittes. This one can be both inflationary and deflationary for the dollar.
2- Huge spending program (including infrastructure, defence and others). This one is going to be probably inflationary.
3- Reducing regulation and reducing taxes. This can be both inflationary and deflationary.
Well, It can be deflationary, because it will make it more profitable for foreign investment to invest inside the USA… therefore, improve the value of dollar compare to other currencies (and even gold)… it means people are going to dump their cash and gold holdings to buy dollar (or dollar dominated asset class stuff, such as stocks and bonds)
It can be inflationary too… because there are only so much of that asset class stuff exists at one time. It means that the price of those asset class stuff can rise compare to dollar (while the price of dollar is rising compare to other currency)… in this case, it is better to dump foreign owned asset class stuff and buy US dollar priced asset class stuff.
And couple of other policies.
There is also couple of outside forces that are not connected to the Donald Trump administration. Such as:
1- Emergence of Chinese currency as another means of international settlement and reduction of petro-dollar regime. Even the Saudi Arabia started to sell its US treasury bills.
2- Sky high stock prices. As we have shown it in the post (Is there a Bubble in The USA Market,) that indicated the divergence of asset class wealth and the GDP growth (in simple language: speculators have borrowed money to buy stocks but the companies that sell those bonds, didn’t invest those dollars into their core business to justify their market cap). Just like the road runner cartoon, we all know that the market so far have refused to look down underneath of their foot and confirm that they are over the cliff and then fell down.
3- The undeniable demographic realities. There is no running away from decades of socialistic malinvestments, unfunded (or defunded) pensions, crazy student loan problems, working class shrinkage (the native working class, which are more productive, less costly because they are already civilised)… and unwarranted immigration that are almost impossible to assimilate.
These mentioned reasons can be very destabilising for the markets specially the currency markets. As an example, if the Europe cannot handle the needs and political inquiries of its citizens and keep ignoring them; the USD to EUR exchange can goes to zero…. Which means euro can end as a currency.
So, if you are a Forex trader, it is time to learn what geopolitics is and you definitely need to check Donald Trump’s twittr account every so often to make sure you didn’t miss some huge policy announcement.
Here is the video related to this post:
and here is an amazing video by Grant Williams; about “The Death Of The Petrodollar, And What Comes After”: