How dollar and yuan are faring after Trump win.
In the months preceding the recent US election, market analysts predicted that a Trump win would send the dollar tumbling down while a Clinton win would push it up. But market analysts would turn out to be as wrong as the pollsters. The US dollar has surged higher than it has ever risen in thirteen years. It would seem that investors are increasingly trusting of Trump’s economic policy and tax plans. An imminent interest rate increase by the Federal Reserve is further bolstering the dollar. It is expected that interest rates will spike further in the coming year. The decrease in jobless claims over the last few months is also responsible for this success. The claims are also expected to decrease in the coming year. The greenback is expected to gain significant ground against major currencies like the Yen and Euro in the coming months.
What about the Yuan, the currency of the second largest economy in the world? The Yuan seems to be reacting quite unfavorably to the US election. China has been caught unawares by the bullish US dollar. Could investors also be wary of Trump’s claims that the China manipulates the value of its currency? Just yesterday, the Yuan posted a 0.5% loss to the dollar and was trading at just over 6.9.
An increase in positive capital outflow is also to blame for the fall of the Yuan. This means that more foreign exchange is going out of China than that which is coming in therefore depleting the country’s foreign exchange reserves. Foreign investors are increasingly ignoring China and this means that less US dollars are coming into the country. Another reason is that the Chinese have started to buy property outside of China partly because of the high property prices across towns in China.
However, some market analysts like JPMorgan are downplaying the fall of the Yuan. Other currencies are going to play a role in Yuan’s strength. JPMorgan postulates that the Yen and Euro could soon edge high which will propel the Yuan forward. Also, it is unlikely that the Peoples Bank of China (PBC) will allow the Yuan to fall for long. PBC has undervalued the currency previously and we expect that the bank will rein the Yuan in in a few months. Even if PBC does not intervene, it is unlikely that the Yuan will remain low for long given China’s stake in the world’s economy.
So what does this mean for investors in China and in the US?
Chinese imports are going to be cheaper for a while. China is the largest manufacturer in the world. The US dollar is the most traded currency in the world. Industry items are going to be cheaper not just in the US but also in countries that import a lot from China. The converse is true. US exports to China will be more expensive. US exporters will be hurt by the strong dollar.
We can’t tell for sure what a Trump election will offer to the strengths of these two currencies in the long term. However ,we don’t think it will be more different than the current situation.