00;00;01;14 - 00;00;44;26
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What is the impact of Donald Trump's election in terms of the US dollar, Global interest rates, and cash flow visibility? Welcome to CurrencyCast! My name is Agustin Mackinlay, I’m the Senior Financial Writer at Kantox and your host. In this special episode, we discuss the foreign exchange-related challenges created by the results of the US election. And we provide a roadmap of sorts to help currency managers navigate the waters in terms of increased FX volatility, shifting interest rate differentials between currencies and impaired cash flow visibility.
00;00;44;28 - 00;01;11;27
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Initially, the reaction in currency markets of news of the election of Donald Trump as the 47th President of the United States was both swift and broad-based. In major currencies, both the JPY and the EUR suffered losses against the USD of about 1.5% to 2%. Even the mighty CHF lost some ground against the USD.
00;01;11;29 - 00;01;47;02
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We also saw some weakness in Asian currencies, notably the KRW. And was an initial decline of about three and a half percent of the Mexican peso against the USD, which was understandable given the impact of all of the trade tariff policy announced by the new president-elect of the United States, although the Mexican peso recovered at the end of the session. Notably, there was also some weakness in Eastern European currencies, as in some of these countries
00;01;47;05 - 00;02;14;03
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markets expect governments to beef up military spending. Although some of the mentioned currencies soften to be recovered against the USD, the question still arises: What lies behind the sudden appreciation of the USD on the heels of the election of Donald Trump as the new President of the United States? Here I think that the notion of the policy mix plays an important role.
00;02;14;05 - 00;02;50;26
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Economists define the policy mix as a combination of fiscal policy and monetary policy. And what can be expected? Well, there's going to be very likely a loose fiscal policy as tax cuts will take effect and the revenue increase from tariff hikes is unlikely to compensate for that shortfall. In the event that the higher budget deficit is seen as inflationary by the US Central Bank, the Federal Reserve may be inclined to tighten a little bit
00;02;50;27 - 00;03;23;18
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USD liquidity. So there you have it. We are likely to face a loose fiscal policy and a relatively tight monetary policy, which is usually a recipe for a strong USD. Note also that the yield on the benchmark ten-year US Treasury bond approached 5.5% after the news of the election of Donald Trump was released.
00;03;23;20 - 00;04;01;18
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Well, we don't advise treasurers to engage in exchange rate forecasts as we think that exchange rates are largely unpredictable. Still, there are some considerations that can be made in terms of the outlook for visibility overall and interest rate differentials between currencies. Now, let's start with a piece of good news. The decisive election of Donald Trump as the new US president means that the scenario of a chaotic transfer of power, like the one we saw in early 2021, is not going to be repeated this time around.
00;04;01;21 - 00;04;34;28
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That removes a short-term risk and that's good news. But there are some clouds over the horizon in the medium term. And they reflect three factors: trade policy uncertainty on the one hand, then geopolitical concerns, and the possible fight over the independence of the central bank of the United States: The US Federal Reserve. Trade policy uncertainty typically reduces trade and it creates uncertainty.
00;04;35;00 - 00;05;22;09
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As an example, every 1% increase in US tariffs leads Chinese exporters to lower the USD prices by about 0.75%, meaning that the outcome of those tariffs is completely uncertain. Now let's consider geopolitics. Some analysts warn about a geopolitical storm ahead. In a recent survey, US Bancorp finds that CFOs and treasurers now rank geopolitical concerns as among the top three risks facing American companies. And finally, there is the matter of the independence of the US Federal Reserve Bank, the Central Bank of the United States.
00;05;22;12 - 00;05;54;22
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Now, let's consider this point in more detail. There is a contradiction at the heart of Mr. Trump's views on the USD. On the one hand, the policy mix he favours is conducive to a strong USD, and we're seeing that right now in currency markets. Also, he has vowed to fight any attempt to undermine the position of the USD as the key international piece of currency, which also is conducive to a strong dollar.
00;05;54;24 - 00;06;31;26
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On the other hand, Mr. Trump sees USD‘s strength as quote-unquote a tremendous burden on American businesses. And that makes sense, especially in the context of some of those swing states which have a strong manufacturing base and where employment tends to suffer whenever the dollar is very strong in currency markets. The question is, would a sharply higher US dollar prompt the US President to try and undermine the independence of the Federal Reserve Bank, the Central Bank of the United States?
00;06;31;28 - 00;07;12;13
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Now, this scenario would have very negative consequences. It would be reminiscent of Turkish President Erdogan's attempt to guide short-term TRY interest rates down. The consequences are well known. The lira collapsed in currency markets leading to higher inflation and higher long-term TRY interest rates. Now the not-so-bad news as Harvard University's Jason Furman explains, is that American presidents have less latitude in terms of monetary policy compared to tariff policy.
00;07;12;16 - 00;07;49;13
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So, for example, Donald Trump would only be able to nominate a new Fed chair in 2026. And assuming that he would be able to nominate a more compliant Fed chair, this person would still have to contend with the fact that US monetary policy is set by a committee, the Federal Open Market Committee that is made up of 12 members, including the Board of Directors and Federal Reserve Regional Presidents, always including the President of the Federal Reserve Board of New York.
00;07;49;15 - 00;08;14;01
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In other words, a scenario like that with the US president having a decisive influence on monetary policy, would have very serious consequences. Among other things, it would cloud foreign exchange risk managers' capacity to assess the degree of forward discount or premium of the US dollar against other currencies.
00;08;14;04 - 00;08;25;06
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But the good news is that such a scenario is unlikely to materialise, at least in the short run.
00;08;25;08 - 00;08;50;02
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FX risk managers have little to gain from a painstaking analysis of the results of the US election. Still, they can make some preparations. So here's a guideline for FX Risk managers that consists of six following steps. Number one: think strategically. The job of FX risk managers is not to save an additional basis point in terms of trading costs.
00;08;50;04 - 00;09;23;07
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Rather is to think as owners. This is done by assessing the investments needed to turn FX risk management into a tool that enhances the value of the firm. Number two: consider cash flow hedging. We see sometimes at large companies that currency managers limit themselves to removing the accounting impact of foreign exchange gains and losses from financial statements, now that might betray a lack of concern from removing the underlying economic risk.
00;09;23;09 - 00;10;00;13
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Number three: avoid arbitrary guidelines. When considering layered hedging programs, many analysts suggest following a 20%, 60%, 80% schedule in terms of the hedge ratios. But this is completely arbitrary and may go against the goal of optimising the impact of interest rate differentials between currencies. Number four: consider the power of delaying hedge execution. With the help of automated solutions that allow you to monitor markets 24/7 by means of conditional stop loss and take profit orders.
00;10;00;16 - 00;10;35;27
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Currency managers are in a position to delay hedge execution, which would translate into a lower cost of hedging in the event of unfavourable forward points, more netting opportunities, and more time to improve and fine-tune those cash flow forecasts. Number five: embrace currencies. If a subsidiary is able to remove FX markups by buying in the currency of their suppliers, this should be given priority, even if it leads to a more complex process in terms of exposure collection.
00;10;35;29 - 00;11;00;24
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And number six: invest in better systems. Deploy systems that are up to the challenge of strategic FX risk management. Steps include a) use systems that allow you to capture all the relevant exposure information from your ERP or your TMS; b) clearly set your FX goals; and c) automate all the execution process.
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