It is not like we are unfamiliar with our new President sending out tweets at all hours of the day and night. In this instance, though, his comment was to The Wall Street Journal and an immediate WSJ tweet about it is what caused an almost instantaneous move in global markets.
“… The US Dollar was already too strong” was the comment, and by the looks of the currency markets they are concerned there is more to come .
Stage 1: post-election period
When the evening of Nov. 8, 2016, came to a close we had a new President-elect and for certain a new way of governing. The currency markets were quick on their feet to interpret all of this and the decision was that this was all good for the U.S. Dollar.
After all, Trump’s campaign rhetoric was focused on a U.S. protectionist policy; significant tariffs on exports to the U.S.; and tearing up of the NAFTA agreement. All of that could mean the U.S. economy should be growing at faster pace, that U.S. interest rates would rise and that in turn should equate to a stronger U.S. Dollar and weaker currencies around the globe.
From that day until Jan. 16, 2017, that all held true. As can be seen in the first graph below, the Dollar rallied versus both developed market and emerging currencies.
The Mexican Peso (1) took the brunt of the Dollar rally and dropped by 15%. Of course, if we tear up NAFTA and put up a wall, their economy will suffer.
It was not just the Peso that dropped. The Yen (2), Euro (3), and British Pound (4) also weakened. (China’s Yuan saw much less impact, by comparison.) Those three currencies have interest rates close to zero. If the U.S. economy grows at faster pace, rates will rise and their currencies should weaken.
Day of the tweet
Now, let’s turn our attention to the second graph below.
In one comment and one tweet we saw all those same currencies—as well as the Yuan—rally and the Dollar drop. We saw interest rates that had moved significantly higher in the two months since the election (5) drop quickly.
Lesson of this episode
This will be the Trump presidency. The global markets will be following social media regularly and over time the currency market will separate out jawboning from reality.