US: President elect Trump has already boosted business optimism – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the foreign exchange market has been relatively stable in the Asian trading session, apart from the exception of the Turkish lira, ahead of today’s press conference from President elect Trump which reportedly will take place at 4pm London time.

Key Quotes

“The questions asked have the potential to be wide ranging and the message delivered from President elect Trump will be less scripted than delivered at the upcoming inauguration on the 20th January. His comments clearly have the potential to be a market mover for the foreign exchange market. The Mexican peso remains on the defensive ahead of the press conference following his tweets from last week warning both Ford and Toyota that they could face “big” border taxes on imports from Mexico. The peso and Chinese yuan in particular are vulnerable to any comments which could reinforce concerns over a shift to more protectionist trade policies. Any comments which provide further insight into the outlook for fiscal policy and deregulation have the potential to impact the performance of the US dollar.”

“One wild card topic which could be discussed although unlikely is his view on the House Republican proposal to adjust corporate tax to a destination-based cash flow system. If he signals support for the border tax adjustment proposal it could trigger a significant strengthening of the US dollar. The border tax adjustment proposal would allow export revenues to be deducted from corporate tax but would make import costs ineligible for deduction. Text book economic theory argues that the US dollar could strengthen by 25% in response to a 20% destination-based cash flow tax. In reality we doubt that that the US dollar would strengthen that sharply taking into consideration that it is already deeply overvalued.”

“The prospect that significant corporate tax reform coupled with plans to ease the burden of regulation is already creating optimism amongst US businesses that it will create a more favourable trading environment. The release yesterday of the latest NFIB small business survey revealed that confidence has surged since the election victory for Donald Trump reaching its highest level since December 2004. The breakdown of responses revealed that 50% of firms now expect a better US economy, 31% of firms expect higher sales, and 23% of firms believe it is a good time to expand which have all improved significantly since the election.”

“It still remains to be seen whether such optimism will be met by a similar improvement in hard economic data although it is clearly sending a positive signal. It supports the initial hope that a significant shift in policies under President elect Trump could help to re-awaken animal spirits and encourage stronger US growth. Very weak productivity growth and disappointing business investment since the global financial crisis remain key structural headwinds to realising stronger growth.”