A sideways look at economics
“A man is judged by his deeds not by his words“
Russian proverb
Despite a disparate set of statements on the campaign trail, there is remarkable consensus among market participants about what to expect from Donald Trump’s presidency: Corporate tax cuts? Huge. Increased infrastructure spending? Tremendous. Burdensome regulation? Wrong. The much-maligned financial elite is now close to unanimous: US economic growth will accelerate, helping to lift domestic stock prices and the US dollar.
The President-elect’s words – and tweets – have moved markets further afield too.
Mr Trump has said that “a lot of good things can happen with Russia if we get along with Russia”. Investors have taken note. Since his election victory, the Russian rouble has appreciated by 2.9% against the US dollar, placing it in a select group of just three currencies that have gained more than 1% against the ascendant greenback over this period.
By contrast, Mr Trump’s statements towards other countries have been less positive. He has said that “Mexico is not our friend” and labelled the North American Free Trade Agreement (NAFTA) the “worst deal ever”. Investors anticipate that Mexico will face more restricted access to the US market – destination for over 85% of its exports. And since 8 November, the peso has depreciated by 11.3%.
But the recent change in sentiment toward both countries reflects Mr Trump’s words, not deeds.
Even if Russia’s relations with the US improve, its economic fortunes will remain heavily dependent on the price of oil. A global supply glut and rising dollar point to limited upside there. Furthermore, despite a recent rally, history suggests that promises of internationally co-ordinated production cuts might be worth little more than a Venezuelan bolivar.
Meanwhile, if NAFTA is only modestly revised, and the flow of remittances from the US does not face an impenetrable wall, Mexico will benefit from the dual tailwind of a more competitive currency and much stronger growth in its predominant export market.
So, buy pesos? Sell roubles? These are just words. Investors will decide themselves whether to take action.
