The parallels between the U.S. presidential election and the UK’s vote to leave the European Union are strikingly similar. The two events bore resemblance both in the underlying dynamics and the ultimate result. Upsetting the political status quo, they championed an ultra-conservative platform that hit home with voters in both nations. Yet despite these similarities, there has been a marked difference in the price action of the domestic currencies that beg the question, which of these things is not like the other.
Anti-establishment sentiment has gained traction in the west over the last few years. Fueled by portions of the population who have not seen the gains from globalization that has done so much to bolster the overall economic landscape. These benefits look great on paper, but often pool at the top without permeating the whole of the population. This manifests itself politically in far-right populist movements which we’ve seen across the Western world, from prosperous Sweden to deeply indebted Greece. Bloomberg has aptly called 2016 the year of the populist and we extend this view of Vox Populi risk to the imminent referendum in Italy on December 4th and in Austria, who may be poised to elect a far-right candidate who has been much compared to Mr. Trump in his ultra-conservative rhetoric, where he has surprised many participants by galvanizing people to reject the status-quo.
The votes to determine Britain’s EU membership and the next president of the United States were neck-and-neck in the polls, yet investors placed their bets heavily on the “safe” outcomes that would reject this new wave of change and maintain normalcy on each front. For both, shockwaves reverberated when investors found themselves on the wrong side of the event. Yet when Donald Trump clinched the title of president-elect, the dollar saw no sell-off to mirror that of the pound when Brexit was confirmed.
Where the Similarities End
Despite the socio-economic and political parallels, the election in the U.S. was not a binary event. Where the repercussions for Brexit were realized as a net-negative for the British pound, as the US election drew closer it was increasingly uncertain how a victory for either candidate would impact the dollar.
The UK had a fixed course once Brexit was confirmed: triggering Article 50. Article 50 commences a formal break with the European Union. This is a formidable undertaking, because although the break itself is fairly simple, Britain will need to re-negotiate their trading relationships that will no longer be defined by their membership in the EU – an undertaking that will be done without the weight of the EU behind them and is likely to take far more than the estimated two years. These concerns pushed the pound to 31-year lows in the months following the referendum.
The ramifications of Trump’s victory are not so direct. Prior to the election itself, Wall Street warned that a Trump presidency would be negative for U.S. financial markets, when in fact it’s proved to be the opposite. While Trumponomics has been highly controversial, his promise of fiscal stimulus and tax rate cuts has caused many top banks on Wall Street to raise their growth forecasts.
Dollar Is King
A win for Trump is a win for the dollar. Last week the U.S. dollar index climbed to 13-year highs. We would look for further dollar upside if the Federal Reserve responds to the fiscal stimulus with additional rate increases as investors suspect. Because the Fed would be operating in an environment where none of their peers are raising rates this would naturally support an extension of the dollar run, but this could spell trouble for Trumponomics. A higher dollar would likely decrease export competitiveness which was a crux of Trump’s campaign platform.
Ultimately, the potential upside for growth and a stronger currency confirm that the presidential election resembles Brexit in politics alone, financial markets are a horse of a different color.
Natalie Ciavarella is a corporate dealer for World First USA, Inc.
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