2017 – The Year of the Trader – For FX Macros and Beyond – Part I
by Bill Hoerter / MTS-FX
How about a few headlines:
- The US is clearly out of its roughly five year hold on interest rates. BIG news.
- Our new POTUS has committed to growth, and campaigned on lowering corporate taxes, repatriating offshore capital and easing regulations, including the ACA’s rewrite. The heads of major institutions have been personally invited to dialogue with him on their state of affairs. This is also BIG news.
Let’s examine elite-trading angles of various policy arguments and weigh in on the new, pro-growth Trump phenomena with which we are now living. First, interest rates have signaled a sea-change to the single most important underlying fundamental of the FX marketplace. Additionally, the coming Growth Agenda from the new administration is fostering huge optimism in all markets and among the vast majorities of traders of all stripes. We look at the first two main thrusts of this macro policy.
ONE: We have raced to the lowest possible interest rate profile globally. Where to now?
One word – UP. There are signs that America’s Fed’s “contagion” in Europe, where the ECB, copying the Fed template, had also raced their interest rates to zero for competitive-trade and liquidity-maintenance reasons among many others – is at long last coming to an end. As anyone who had traded FX prior to these suppressed, Zero Interest Rate Policy (ZIRP) years will remember, this particular “fundamental” underlying our markets became extremely counter-productive to making profitable trades.
When, in the year from Nov. 2007 to October of 2008 the financial world collapsed, our Fed took our Fed Funds rate from over 5% to a mere 0.25%, greatly assisting our corporate balance sheets, aiding in rallying the precious metals hundreds of percentage points, but driving other assets, including the relative value of the USD, to untradeable status. Zero and in a few global instances, negative interest rates were soon achieved, which by definition, greatly stifles growth.
As Europe, via the ECB, followed suit, the globally influenced foreign exchange marketplace became mired in a multi-year long range that effectively killed the great trading swings that can only come from the normal ebbs, flows and headlines driven by inter-country interest rate changes. The relatively flat (or range-trading) rate differentials established during the five years following that 2011-12 equalization of international central bank rates (at zero or extremely low) led to, among a few factors, to wide disinterest in trying to catch price moves and trends that simply did not exist.
The FX ANGLE: The lifting of ZIRP alone is the single most important fundamental driving foreign exchange trading on every level; including retail, institutional, and corporate.
Additionally, the Flat-Line in the quality of jobs has been brilliantly disguised for eight years as the cheap-money pump of the Fed’s QE-driven, balance-sheet-bloating disguise has greatly stifled Number Two – examined next.
TWO: A big one. (A topic unto itself, but condensed here): Growth in the workplace via rewriting the Tax Code, Repatriation, Regulatory Easing, and New Dialogues. What does this mean to traders?
The US has the highest corporate tax rates in the world, of the free-market giant economies – which leads to all sorts of issues. The movement of businesses offshore, particularly in the manufacturing, banking, and technology sectors, because of high tax rates and rising labor costs; has crippled many once-thriving urban areas across the American landscape. This fact along with the far-cheaper labor overseas, has led to the destruction of middle class families as millions of these once-thriving jobs have simply disappeared. Theory? Proven. Lower corporate tax rates drive growth exponentially once they are baked into the culture. Supply-side economics – it has worked in the past. It’s on the table again.
Repatriation. There is estimated to be over $30Trillion overseas, parked safely away from the punitive tax burden that its corporate sources would be subject to had these profits been earned within the United States. The new administration has pledged to end this burden, via a number of methods – including lowering the corporate rates outright, plus offering corporations some kind of “tax holiday” on repatriating their offshore holdings. We bring in $30Trillion of workable capital, and the results are self-explanatory, and obvious.
The promised reexamining of Regulatory Burdens, as in Dodd-Frank – placed on the business community writ large, is a phenomenon largely reviled by Small Businesses and homeowners as severely curtailing their access to capital and credit – which has been THE largely unintended consequence of its creation. Passed into law on purely partisan grounds, it has taken sharp effect within the last seven years, and for ostensibly the “right” reasons – Including consumer protection and the abeyance of bad business practices – yet the unintended consequences of these good intentions has been to the great detriment of small business provenance. The promised rewrite of D-F, and lessening its burden to business in general is perhaps the single-most anticipated change coming to Trump/America’s newly freed markets.
Also in the “quick-start” pipeline is rewriting the “Affordable” Care Act. This insurance reform alone will allow companies big AND small the ability to properly project their costs and honestly assess their budgetary needs – something missing in business governance for at least 4 years – yet another factor which has led to hiring stagnation. The ACA is in a death spiral as costs explode and insurers drop out of the government’s marketplace. The ONLY affordable path is to rewrite this law with free-market solutions.
Finally, the visitation by invitation of union bosses, corporate heads, and industry leaders across all sectors to the White House in the first weeks of the Trump administration is a precedent-setting seminal event in earning trust between government and the private sector – two groups traditionally at odds with one another. There is NO downside to these events, and will lead to Corporate Confidence, likely the single greatest factor driving free markets on a positive trajectory.
Job creation, from any and all of these changes in the marketplace leads to wealth creation, which leads to consumption of commodities, and the investment of capital. These are all necessary things for thriving economies, and create a continual tapestry of investment opportunity.
The FX ANGLE: The transfers of currencies from place to place leads to tremendous foreign exchange opportunity, which in turn drives price action. This is Trading 101 – movement equals price action, which yields profit potential. Economic growth by itself, leads to capital and wealth creation on both institutional and private fronts; as companies large and small create new income and traders accumulate wealth via profits. This capital creates reinvestment and ultimately tax revenues that lead to greater growth when shepherded properly – by any entity other than the government.
In reinvestment, The Chicken lays the Egg, which hatches the Chicken. No one cares who came first.
In Part II We’ll cover two additional topics of great significance from the first weeks of the new administration: the effects of Brexit, and our world at risk – and how these effect our world of foreign exchange and our ability to profit from their existence.
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