President-elect Donald Trump has had major contradictions as a candidate. He managed to woo the working people that lost their manufacturing jobs but promised tax cuts on the wealthy. His economic plan’s numbers did not add up, and his erratic behavior makes him unpredictable. He even praised the unpredictability as a negotiation tool.
While his policies could be messy and even dangerous, there are good reasons to believe that his elections will be positive for the forex industry.
Here are three reasons to be hopeful for anybody involved in the industry:
1) Undoing Dodd-Frank and other regulations
While Trump has a low attention span, his party now commands control over both the Senate and the House. This means they could pass quite a few laws that were approved during the Obama years. This includes the massive regulation of Dodd-Frank that followed the financial crash. Less regulation on the financial sector has already boosted financial services stocks and could result in more activity also in the small US foreign exchange industry.
The industry has been squeezing in recent years, and its fortunes could improve now. While not all the troubles are related to Dodd-Frank, an environment of looser regulation could have a positive impact. This includes easing limits on leverage, allowing for firms with lower capital to jump in and removing other barriers for brokers and traders alike.
2) Higher Volatility
Election night and the days that followed saw very high volatility in markets. GBP/USD rose initially, crashed afterward and then surged to new highs. It isn’t the only currency pair that saw wild moves.
And there are good reasons to believe this will continue.
The aforementioned erratic behavior of Trump and unpredictability could provide many surprises to markets. Such volatility is not only the result of the administration’s decisions but also the result of the reactions of the Federal Reserve which could provide even more confusing forward guidance.
3) Boom and Bust?
Trump wants lower taxes but fiscal spending, specifically on infrastructure. This will result in a bigger debt. The leap in bond yields in the days following the elections reflects this. It also promises more growth and more inflation, justifying higher interest rates. The odds for a rate hike in December have risen.
Everybody wants stronger growth after long years of anemic growth, but also no recession. A rapid expansion rate now could result in a bubble: a bubble in inflation: higher prices due to government spending and lower taxes as well as other bubbles, perhaps financial ones, as regulation is loosened.
And after a big boom comes a big bust.
The best times for forex brokers and traders are in busts. It is not nice to say this, but busts result in higher volatility. Busts also mean that investment in stocks is less attractive while speculating on currencies is more lucrative.
It is important to note that in theory, Republicans oppose raising the national debt so that they could curb some of Trump’s plans. However, he won the elections despite tepid support from them, and he has the mandate, at least in the first 100 days of grace.
What do you think?
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