On the eve of his inauguration Donald Trump made a pronouncement that did not get as much play in the media as it should have, likely because scuffles via Twitter with the media and recalcitrant Democrats won the headlines.
In a recent interview with the Wall Street Journal, Trump declared the U.S. ‘dollar is too strong.’ It was a nuanced statement about his monetary policy that revealed quite a bit more about the future of the world economy and how President Trump will deal with trade and monetary imbalances that have plagued the West for over a decade.
Finance and trading expert Mike Galiga unpacked the statement and projected what he thinks it may mean for the U.S. economy and specifically for investors in 2017.
“For years now China has been deliberately devaluing its currency both to bolster the Chinese stock market and to maintain the upper hand in the trade deficit,” detailed Galiga.
“What it means is very simply this: China can manufacture all sorts of things much cheaper than any other nation in the world, which gives it a competitive edge. This means they can export much more than they import because their goods are cheaper than everyone else’s.”
Donald Trump made China a favorite whipping boy during the presidential campaign arguing that, if elected, he will work hard to force China to stop its currency manipulation.
Should he do that, explains Galiga, there could be very serious implications for the U.S. economy and for investors. “With his ‘dollar-too-strong’ comment, Trump could be signaling that intends to counter-punch China by intentionally weakening the U.S. dollar to make us more competitive. And that means rising interest rates and prices.”
“It also means a potentially devastating hit to the Chinese economy both in terms of the trade imbalance and in terms of domestic manufacturers should Trump make good on his threats to impose sanctions or import taxes on Chinese goods,” continued Galiga.
“This means investors heavily leveraged in the Chinese market will likely follow the exodus of investors from the rest of Asian sector and from the Eurozone toward the U.S. stock market. This would likely further inflate the U.S. stock bubble.”
Galiga explained that, in addition to opportunities to short the Chinese stock market, investors could see growth opportunities in U.S.-based manufacturers and simultaneous short opportunities with U.S. retailers who are heavily reliant on the import of Chinese goods.
Whatever Trump’s intentions really are, it is likely they will become very clear in short order as he continues to pressure Congress to act on many of his agenda items within the first 30 days of his administration.