Let’s pretend like there’s some continuity in Trump’s policy platform.
Some “method to the madness,” so to speak.
I know, that’s laughable, but let’s just pretend. Because after all, it’s pretty difficult to trade when there’s zero policy continuity.
Traders are tired of being proverbial “deer in headlights.” We’d like to be able to extricate ourselves from the prevailing paralysis.
Below, find former FX trader turned Bloomberg contributor Mark Cudmore’s attempt to make sense of the Trump FX trade.
Via Bloomberg’s Mark Cudmore
With the recent sputtering of the bullish-dollar reflation trade, perhaps it’s time to pay a bit more attention to what the president and his advisers are saying about currencies. A potentially tradeable pattern is emerging.
- The administration seems determined that currencies which are “undervalued” based on purchasing-power-parity (PPP) measures, and are issued by nations with current-account surpluses should strengthen
- Looking at these drivers in isolation, the policy seems logical. In reality, neither factor tends to be particularly important on anything less than a very long-term horizon. Unless — and here’s the fun bit — there’s a macro catalyst to bring them to the fore. The political shift in the U.S. could be that spur
- Within G-10, Switzerland has the largest current account surplus, yet the most expensive currency based on IMF’s PPP. Norway is next up in both categories. The only G-10 peers with both a surplus and relatively undervalued currency on PPP are the euro and the yen. Both were recently singled out
- However, within emerging markets there are a number of currencies that qualify. The standout is Thailand: forecast to have a 2017 current account surplus north of 7% of GDP, and the baht is 65% undervalued, according to the PPP measures. Its largest trade surplus is versus the U.S.
- What about the other side of the equation? Those currencies that have current account deficits yet are overvalued? Only five currencies count as being more expensive PPP-wise than the greenback. Only two of them have current account deficits: the Australian and New Zealand dollars
- So if it can be assumed that Team Trump A) is guided by a coherent and global view of how currencies should behave, and B) will stay on message, then AUD/THB and NZD/THB look vulnerable. Admittedly, those are big ifs
