NOMPU SIZIBA: The people of America spoke yesterday, giving the Democrats prominence in the House of Representatives and the Republicans prominence in the Senate. So what are the implications for US domestic and foreign policy, and how has this fed into the US dollar, which is an important trigger for global markets?
Well, to give us his take on what’s gone down, and the various implications, I am joined on the line by Jameel Ahmad, who is global head of currency strategy and market research at FXTM.
Thanks very much for joining us, as always, Jameel. The Democrats have taken the House of Representatives and the Republicans maintain a stronghold on the Senate – so was there any market reaction either way to the outcome of the mid-term elections?
JAMEEL AHMAD: Thank you very much for having FXTM, as always. Basically the markets have taken this news pretty well because, for once, when you consider all of the shocks with elections in the past couple of years, specifically around the UK, Europe and the United States, financial markets and investors were well positioned for this eventual outcome. So this is why we are seeing some improved risk appetite so far today, especially as the trend has progressed, we’ve seen this in Europe, we’ve seen a positive then in the United States just kicking off. We’ve seen a lot more improved risk appetite towards the point of a lot of different emerging market currencies edging higher against the US dollar, which includes the South African rand, the proxy for evaluating investor appetite towards risk – it is up by over 1% today, basically because the markets have taken this news pretty well. There’s not going to be some sign of instability when it comes to politics in the United States, and those really unlikely risks of the liberal Democrats taking over even further control gets them enough influence over to potentially impeach Donald Trump. And all these other unlikely risks have been hidden away – at least for now.
NOMPU SIZIBA: So what does this mean for Trump’s America First policy, and might he have to tone down the rhetoric and action in relation to trade issues with China as the Democrats are more inclined to work with their global partners, rather than antagonise them? And, depending on your response, what does this mean for equities and currencies?
JAMEEL AHMAD: The narrative for China is going to be a very interesting one to monitor specifically, moving forward, because you are right, the liberal Democrats have this global view. They are very pro-globalisation and probably can provide assistance to President Trump when it comes to pushing the amount of protectionism …[2.24], which is something that we’ve seen a lot over the past 18 months or so. This is definitely something we are going have to monitor. Interestingly enough, the initial response is that the liberal Democrats have not taken over enough control – for example the Republicans are still in control of the Senate – to really push the brakes on President Trump and China. So they’ve not seen that much more of a response positive in the Chinese yuan. However, the Democrats having missed control – now it has improved from yesterday – might provide some obstacles towards President Trump pursuing further fiscal stimulus in the US, and provide even further pro-American policies, which is probably why investors are gradually unwinding further from US dollar positions, which could be good for markets, but it’s definitely going to make things interesting to monitor from afar.
NOMPU SIZIBA: Meanwhile Chinese authorities, both monetary and fiscal, are trying to pull all the levers available to them to stimulate continued growth in the Chinese economy. Can they succeed– even if import tariffs are ramped up in terms of percentage and volume, as threatened by President Trump for early next year? And of course, if your response is a negative one, what will that mean for their demand for commodities?
JAMEEL AHMAD: They can succeed. However, what they would need to accept over the near term is the likelihood that everybody knows that China will be more impacted by this trade war than the United States. It’s natural, because the US imports a helluva lot more from China than China does in the other direction.
So China is the one that’s going to be impacted by this the most. That has been shown in economic data over the past couple of months.
Now, what China can do is accept that the new normal could be even more down to its economic growth, which is probably what’s going to happen. We are seeing solid growth in China. But to think of ways to really try to reinvigorate the economy, what it does for domestic spending or domestic growth and, over the longer term, the expectation is that President Trump will sit down with the leaders of China later this month at the G20 meeting in Argentina, and that hopefully there will be a breakthrough.
The inner suspicion is that President Trump does not want a trade war either, and just he has got this very hard-line trade narrative, which he has used a lot to rally his supporters, and that any deal he gets on this point, when it comes to improved trade barriers or any kind of improved trade deal with China, if they make him look like a hero to his voter base, which is obviously what he wants, and why financial markets seem to be a little bit more relaxed by about these trade tensions than what they were when we last spoke a couple of weeks ago.
NOMPU SIZIBA: Yes. With Minister Trump’s anti-immigration stance, how has the election outcome impacted the likes of the Mexican peso? Can South Americans with intentions to head to the US feel a bit more confident that they won’t be met by the military at the Mexico-US border?
JAMEEL AHMAD: We need to see what happens when the United States wakes up later today, because the US markets have only opened recently and it’s expected that President Trump is going to make an address later today – I think it’s 1:30 Washington time. So maybe they will touch on those issues. But, as we are speaking right now, the Mexican peso is actually one of the few currencies that has weakened against the US dollar today. So that suggests that this change in power, this change in play with the US midterm outcomes, might not have that much of an impact on the very anti-Mexican agenda that President Trump has carried. And perhaps it is where the Mexican peso has not reaped the benefits of the likes of the South African rand when it comes to seeing widespread dollar weakness, because we have seen widespread dollar weakness today. The Mexican peso was one of the few isolated examples that has not benefited. And, interestingly enough, the Chinese yuan which is the other.
NOMPU SIZIBA: You suggest that had the Democrats also taken the Senate, it could have been quite negative for markets as possible impeachments proceedings could be brought against President Trump. So are you saying, based on the current outcome, you don’t foresee any possibility that during the balance of his term he will face impeachment proceedings.
JAMEEL AHMAD: Well, there are still two years left, and anything can happen in two years, as we’ve seen with this very unpredictable administration. But we can say that over the near term these risks have gradually reduced and it probably was seen as the worst outcome to this election in terms of financial markets. If the Democrats would have got control over the Senate as well, then yes, the markets probably would have been at risk of tanking. We would have seen a lot more volatility, because of these threats that we could have a possible impeachment or there could have been all sorts of roadblocks and hurdles when it comes to legislative reforms, which is what investors did not want to see.
We can take the brighter perspective that the financial market volatility over the past 24 hours or so has actually been contained. It has been a lot more moderate than what I had prepared myself for personally. So things are a lot more positive that this outcome is sustainable for the medium and longer term, and it avoids some nervous risk for financial markets.
NOMPU SIZIBA: So while we speculate on what this election result will mean for US policy – domestic and foreign, of course – that economy’s dynamics remain quite strong, with low unemployment levels, higher wages. The independent Fed is likely to continue doing its thing of raising interest rates so, in the interim, can we expect more adverse impacts for emerging markets like South Africa?
JAMEEL AHMAD: Well, US interest-rate policy is something that I still think has been mostly priced into the US dollar. We have the Federal Reserve position outcome, tomorrow, on Thursday. So what we’ll look for is the policy statement and whether the Federal Reserve indicates annual adjustments to interest-rate policy over the next 15 months. Otherwise we very much expect another four interest-rate increases from now until the end of 2019, which has been mostly priced in a we talk now. What we do need to see, looking forward, is whether the ideas or the thinking that President Trump could be about to unleash further tax cuts or further fiscal stimulus, or further stimulus to provide another uplift for the US economy, whether that is an obstacle now in terms of legislative reforms, because the liberal Democrats do have some more influence now than they did 24 hours ago.
So that’s more of a driver for the US dollar. It’s probably why the US dollar has gone lower today, and it’s probably a reason why the emerging market currencies in general have rallied against the US dollar – and that’s what I would look out for more now that US interest-rate policy outcomes.
NOMPU SIZIBA: Thank you, Jameel. Always good to have you on.