Impact of Trump’s First 100 Days on the Financial and Forex Markets

January 08, 2017 14:14

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Dear Traders,

The US President-elect Donald Trump will officially become the 45th President of the United States on Friday, 20 January 2017 in Washington, D.C. The inauguration will start Trump's four-year term as President, together with Vice President Mike Pence.

Typically, the first 100 days of a presidency are considered to be a benchmark for the first possible evaluation of a President's direction. In line with tradition, Trump has announced the priorities and plans for his administration during the first 100 days.

Today, our article reviews a list of policy ideas that impact the US economy, the financial and Forex markets, and potential price movements. What kind of developments can traders expect to see in those first 100 days? Let's find out now.

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Less financial regulation: remove Dodd-Frank act

The Dodd-Frank act was initiated and passed during the Great Recession of 2008. Its aim was to prevent the financial sector from creating a new economic downturn.

The Dodd-Frank act changed the financial regulation in the US and aspired to promote the financial stability by, for instance, improving accountability and transparency as well as ending bailouts and 'too big to fail'. For example, the act allowed the Fed to require banks to hold more cash, which reduced the bank's risk but also their investments and profit margins.

Criticism of the act can be found on both sides of the aisle: one group saying that the regulations are too strict (less regulation needed), while others are warning that they are too loose (more regulation needed).

The most important opinion in this matter, however, is the position of President-elect Trump who has vowed to dismantle the Dodd-Frank act. What does that mean for the market and traders?

Here are some of the possible expected trends with less regulation:

  1. an increase of profit margins fuels a bullish rally in bank stocks and the US financial sector in general during the first quarter of 2017 and 2017 in general
  2. day traders could see their leverage increased and other restrictive measures removed
  3. some brokers might return to the US market and Forex and CFD Traders could have a wider choice of financial products and brokers.

Of course, the expected developments will depend on the exact details and outline of Trump's plan to remove the Dodd-Frank act.

Withdrawal from Trans-Pacific Partnership (TPP)

The Trans-Pacific Partnership (TPP) is a proposed trade agreement among twelve countries of the Pacific Rim. The goal of the deal, which includes large nation such as the US, Australia and Japan, is to promote economic growth, create new jobs, enhance innovation, and much more.

For instance, the TPP incorporates lower tariff barriers between the twelve countries. Proponents, such as the World Bank, claim that this will benefit the economy and increase the GDP of its participants.

The combined GDP in 2015 was already a staggering $27.4 trillion but the partnership should see net positive economic outcomes for all participants. Opponents of the TPP counter the GDP growth by indicating that it could hurt wages and result in job loss.

Trump is in the group of opponents and promised to withdraw from the deal both in his presidential campaign and his 100 day policy start. It seems therefore unlikely that the US will be part of the agreement. Traders can expect a clear impact on the deal.

First of all, the entire agreement could disintegrate once the US withdraws. The US is an integral part of the TPP deal and according to the Japanese Prime Minister Shinzo Abe, the agreement loses all of its value if the US withdraws (FT). From a geopolitical point of view, this could weaken the ties between the US and other 11 members and reduce the prominence of the US in the Pacific Ocean.

Secondly, the failure of the TPP deal is also a new continuation signal of the anti-trade and anti-globalisation sentiment that is rising in the US and Europe after the Brexit vote.

Corruption and special interest collusion

The President-elect has indicated that tackling corruption and special interest collusion is a top priority. This includes amendments to the Constitution by imposing term limits on Congress members, regulation simplification, and bans imposed on:

  1. White House and Congressional officials becoming lobbyists after they leave government service
  2. White House officials lobbying on behalf of a foreign government
  3. foreign lobbyists raising money for American elections.

While these will not directly affect the markets, they will reduce the foreign influence on American politics. Their longer-term effects, however, are yet to be seen. Trump himself will also remain scrutinised for the conflict of interest arising from the presidency and his own businesses (list of conflicts), which a development traders want to keep an eye on.

Protecting the American labour market

While we have covered some aspects of market protection above in the US intention to withdraw from the TPP, other aspects designed to protect the US labour market include:

  1. labeling China as a currency market manipulator – the effect of this is yet to be known for the Forex market as China is not the only country that has a dirty float.
  2. renegotiating or withdrawing completely from North America Free Trade Agreement (NAFTA), which would adversely impact the economies and the currencies of Canada and Mexico.
  3. lifting current restrictions on the Oil and Gas industry in the USA, which is likely to raise Oil production in the future, and create jobs in the USA, reducing their import reliance on Oil and Gas.
  4. cancelling billions in payments to the U.N. climate change programs and investing the savings into more jobs as well as fixing America's water and environmental infrastructure.

Tax Relief and Simplification Act

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Originally designed to grow the economy 4% per year and create at least 25 million new jobs, this plan may prove to be too big of a bite for Trump's administration to chew.

The current number of brackets should be reduced from 7 to 3, and tax forms should be greatly simplified. The business rate should be lowered from 35 to 15 %, and the trillions of dollars of American corporate money overseas should be repatriated at a 10 % rate. The middle class will see slight changes, but keep in mind that they pay a lot of payroll taxes rather than income taxes, which would not change (tax changes).

If this plan goes live, we should see another boost for USD strength and greater volatility in the financial and Forex markets.

$1 trillion infrastructure investment still on?

This act that creates the leverage in public-private partnerships and private investments through tax incentives should spur $1 trillion in infrastructure investment over 10 years. It is revenue-neutral.

The focus is on keeping and creating jobs in the US. Depending on execution and plans, it could be positive for the US economy and bullish for inflation.

Another rate hike in the US? Only time can tell.

Cheers and safe trading,

Nenad and Chris

trade forex and cfd