The Weekly Update

With Trump likely to boost government spending, there will be even more attention than usual on the strength of the US economy. Despite the recent optimism, the reality is that real GDP in major economies has been declining steadily over the past 40 years, with ageing populations being a major factor. Friday’s December non-farm payroll release showed 156,000 jobs added which compares to 271,000 for the same month of 2015 and 292,000 the year before. The lower-than-expected reading was sufficient to nudge the unemployment rate higher to 4.7% from November’s reading of 4.6% and the participation rate was unchanged at 62.7%. Even if Trump’s policies do succeed in boosting growth in the short run, which seems quite likely, the underlying backdrop of ageing populations in the major economies will prove to be a significant headwind.

The other thing to watch will be global trade. Whether the actual impact of a Trump Presidency on global trade will turn out to be as negative as the campaign’s protectionist rhetoric remains unclear save that even under a better case scenario Trump is clearly looking to renegotiate the status quo. While NAFTA (with Canada and Mexico) is one agreement that he has been particularly vitriolic about, describing it as ‘probably the worst trade deal ever agreed to’, any country running a large bilateral surplus with the US could well find themselves in the firing line.

The US Treasury already releases a Semi-Annual Report to Congress on the Foreign Exchange Policies of Major Trading Partners of the US as part of a view of the exchange rate and externally-oriented policies of its major trading partners. In the October report Germany, China, Japan, Korea, Taiwan and Switzerland are all on a monitoring list having at least 2 of the following 3 traits: a material bilateral trade surplus with the US, a material current account or exhibiting persistent one sided foreign-exchange intervention. That said, under that review period none of the named countries exhibited all 3 traits or were considered currency manipulators. Nevertheless, this list of countries may find themselves more heavily scrutinised under a Trump administration.

China’s trading relationship with the US seems an obvious target with the Trump campaign voicing concern about currency manipulation. China’s decision to broaden the basket of currencies in its trade weighted index at the tail end of last year, from 13 to 24 currencies, means that the basket is now more representative of China’s trading partners as the previous basket excluded South Korea, which is China’s 4th largest trading partner. Although the timing of this move is probably unrelated to Trump’s victory, the stability or otherwise of the renminbi against the basket will be closely watched and provides a much better measure of whether the currency is being allowed to depreciate. In fact, since the middle of last year the renminbi has been broadly stable to stronger against the basket.

Nevertheless, holders of renminbi did lose 2.23% last year if they measured their performance in US dollars, although holders of euros would have lost 3.85% and sterling holders would have lost 16.3%. Whether you would have been better off holding renminbi last year depends on your starting position and 2017 will be no different.