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2016 was a decidedly volatile year in terms of currency trading and 2017 could be just as unpredictable. This observation is further heightened due to the fact that (for better or for worse) Donald Trump is now the president of the United States. This situation leaves many currency traders wondering how the Forex markets will react to such an unexpected paradigm shift and how they can capitalize upon any sudden movements. Although nothing has yet been written in stone, there are still some important observations to consider.
The Impact of Trump-Style Protectionism
“Build the Wall” was one of the most common phrases in the Trump campaign. However, this can be extrapolated far beyond Mexico alone. He has promised to do away with many of what he considers to be “unfair” trade arrangements between the United States and major partners such as China. The main concern is that this populist approach may result in a weakening of the dollar and could even usher in a new era of trade wars (1). In such a case, the dollar would no longer be a safe haven and traders could turn towards more resilient currencies such as the British pound and the euro. It is also important to note that with a few exceptions, a new republican president tends to temporarily weaken the value of the dollar.
Emerging Currencies
Another very real concern is the impact that a Trump presidency will have upon the market of emerging currencies. Many feel that these will suffer as a result of what can only be called a heightened sense of domestic protectionism. However, we need to keep in mind that Trump has already reneged on many of the “promises” made during his electoral campaign and it is likely that his cabinet will seek to tone down such rhetoric. It is still undeniable that traders will keep a close eye on the state of emerging economies.
A Favorable USD-GBP Scenario?
Many British traders will likely be looking to capitalize on the relative weakness of the dollar when compared to the pound. Of course, this only stands to reason. Such a movement may actually be quite favorable for Great Britain, as weeks of speculation in regards to the economic impact of the Brexit could now be superseded by concerns emanating from across the pond. It is therefore likely that the coming weeks will be highlighted by short-term ventures into GBP-USD trades.
Overall Uncertainty
The bottom line is that much like the equity markets as a whole, we are likely to see a great deal of uncertainty during the first quarter of the 2017 financial year. Thus, overall liquidity within the Forex sector is predicted to lessen as investors embrace a “watch-and-wait” approach. There is still no doubt that such a volatile atmosphere will dictate that traders must keep abreast of the latest news as it becomes available. CMC Markets provides expert analysis, access to live investor sentiment and late-breaking data when it is needed the most.
While the Trump presidency has taken the world by surprise, the immutable fact is that we are likely to witness a great many changes in the coming weeks and months. Those who can leverage such movements will be able to make the most out of this unpredictability.
I have 25% of my portfolio sitting in foreign equity. If the dollar strengthens I plan to add more of international equity, if not I will continue loading into US equity. I don’t know what the future will be, I try my best to adapt.
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Hi dividendgeek,
As you stated, no one really knows what the future will hold. All you can do is stay invested, be diversified and adjust as times change. The only foreign exposure I have is through a few of my foreign holdings like DEO, UL, IR, ALLE among others. Thank you for commenting.
It is always interesting to me when people say “I’m buying foreign stocks”. However, what many people don’t realize is that it doesn’t matter where the headquarter of the company is located, it is where it’s revenue is being generated. Almost half of sp500 revenue is generated overseas. So, you already have a good exposure to the foreign market, if you think about it that way.
What should be concerning, is the difference in gap between a strong dollar vs other currencies. Those sales overseas are converted back to dollars. This could either make the revenue seems smaller for companies, or more expensive for other countries to purchases product/services from U.S. companies.
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True S&P 500 gets is major chunk revenue from overseas. Still that is subjected to a currency fluctuation. The international fund that I own is not hedged. So, I believe I get genuine exposure to overseas markets.
My objective is not to maximize returns, it is to minimize risk and at the same time maximize returns. US does have the secret sauce, US markets have consistently outperformed world markets.
Hi dividendgeek,
The bottom line is that no company is immune from currency fluctuations as we truly are a global economy these days. As long as the U.S. dollar remains strong and is the reserve currency of choice for most countries we’ll have to deal with those impacts on American domiciled corporations.
Hi MD,
Well said. It’s true that many U.S. domiciled corporations derive most of their revenue from overseas. Look at YUM’s recent spin off of YUMC as foreign revenues and growth accounted for more than domestic income. While I hold several true foreign stocks like UL, DEO, IR, ALLE and others I realize that many U.S. companies in my portfolio could be considered foreign entities when based solely on where their revenue is derived. Clearly, the strong U.S. dollar is affecting many American corporations these days as exchange rates impact top line revenue. This is just one headwind VFC is currently facing. No doubt foreign exchange rates will always play a role when it comes to company earnings but the thing to remember is that over the long run it shouldn’t matter as all economic cycles ebb and flow and corporations tend to adapt to changing economic trends. Thank you for stopping by and commenting.