How will the financial markets react if Trump wins again?

The implications of a second term for Trump arouse most interest and arguably the most uncertainty. However, there is a template we can use that might help to map out future financial market direction. It is Trump’s 2016 election victory. But whether hindsight is of any use at all is always open to question.

Trump won the 2016 election with pretty much the same policies that he is proposing now: tariffs, tough migration laws, and lower taxes. Of course, things have moved on from 2016; numerous tariffs are already in place and migration policies are directed towards returning undocumented migrants to their homeland rather than building a wall across the Mexican border.

However, by and large it does seem as if the market views the policy prescription as basically the same and, importantly, thinks that the reaction to a Trump victory will be the same as well. Just in recent days we have seen the dollar edge higher as polls have moved (minutely) in Trump’s direction. This suggests that the market is girding for a stronger dollar should Trump win on November 5^th and we dare say that the majority of analysts and investors think the same thing. But that only covers the knee-jerk market reaction. What happens after that?

The 2016 template tells us that this post-election rally in the dollar ran out of steam pretty quickly. For instance, the slide in euro/dollar from around 1.10 at election time to a low of 1.04 a few weeks later was already on the way to being reversed by the time Trump was inaugurated in January 2017 and, over coming months the dollar slipped even further, reaching 1.20 by August 2017.

What’s more, 2017 was a year in which the Fed was lifting policy rates at a time that other major central banks throughout the G10 left policy unchanged. In short, the environment seemed perfect for the dollar to rally, but it did not; it fell. This experience would seem to suggest that, even if we knew all the relevant facts in advance, like the 2016 election outcome, the prospect of tax cuts and the Fed’s subsequent rate hikes we still might not have guessed the dollar’s direction correctly!

This brings us on to 2024. Is Trump’s election win in 2016 a reliable guide to what we might expect over the next year, or more, if he wins the keys to the White House once again? The most notable difference now is that the backdrop is one of Fed easing. In other words, if there were seemingly good grounds for the dollar to rally in 2017 they seem a lot shakier now that the Fed is easing unless, of course, the Fed delivers a handbrake turn on a Trump win and tightens policy, which we doubt.

This being said, Steve Barrow, Head of Standard Bank G10 Strategy doesn’t deny that we could see the same knee-jerk rally in the dollar in the initial days, and possibly even weeks after a Trump win, but the case for durable dollar strength seems weaker than it was the first time Trump won the presidency. Whatever we might think about the likely election outcome and its impact on the US dollar, the truth is that the US dollar does not always move in a way that is predictable.

“For while we might isolate factors such as election outcomes, fiscal implications and monetary policy trends as key determinants of currency movements, all sorts of other issues are at play as well, and that actually speaks to a view that we have aired many times before, which is that history is a good guide to the past. In other words, the dollar might have fallen through 2017 as Trump took up office, but can we use this as a template should he win again in a few weeks? The answer might seem to be ‘no’. However, this being said, our view is that a Trump victory this time around might actually produce a response that is similar to 2016/17, with any dollar strength quickly running out of steam. If we are right, then investors should be wary of believing in any dollar rally that develops in the immediate wake of a victory for Trump next month”, said Steve Barrow.