The world is on standby, awaiting an historic 20th of January when the 45th President of the United States of America, Donald J. Trump, is sworn in and gives an acceptance speech in front of hundreds of thousands, if not more than a million, that are expected to descend on Washington, in front of millions that are expected to watch live and in front of as good as the entire world during the news.
In trading halls across the globe, the suspense will be palpable as testosterone levels reach climax looking for the slightest clue on how to place their bets. In Germany, Merkel will be closely watching, wondering what now for Europe. In China, they are unlikely to get much sleep with officials probably staying up until late at night. In Mexico, they’ll probably be too busy dealing with the currency mess Trump has already created for the peso. In Russia, Putin might be too drunk celebrating to pay much attention. Arabia, however, will be very sober.
This is not just any inauguration. The world changes tomorrow and it will do so structurally and fundamentally. From China, to Europe, to Mexico, to Arabia, Trump has laid out a vision of a very different world.
Some thought they might get a glimpse of it during his press conference on the 11th of January, but unfortunately, the mainstream media was far too preoccupied with just one question, completely failing in their duty and squandering a unique opportunity to learn more about Trump’s plans. Still, one thing did come out. Trump appears to be serious about building a border wall with Mexico.
Almost instantly, his comments sent the peso down plunging. It fell a further 2% yesterday to a record low as Wilbur Ross, the commerce secretary nominee, said at his confirmation hearing on Wednesday that the North American Free Trade Agreement with Canada and Mexico “is logically the first thing for us to deal with”.
NAFTA provides an elimination of most tariffs on products traded between Canada, Mexico and USA. Trump aims to repeal it because he says the VAT applied to products that enter Mexico which is rebated to products that leave Mexico acts as an implicit tariff, giving the country an unfair trading advantage. He aims to re-negotiate the economic arrangements between the two countries so as to ensure free and fair trade.
That may mean Mexico’s economy weakens, sending their currency down, inflation up, and potentially causing a flight to safety. In the circumstances, one choice for Mexican residents might be bitcoin, which has reached an all-time high level of interest during the first week of this year.
A more unfortunate gain for bitcoin would be if Trump does indeed clamp down on remittance to Mexico where $24 billion was sent in 2015. Such draconian measures are, however, unlikely and were suggested as steps he may take only if Mexico doesn’t pay for the wall. That is, as a negotiation tactic.
Nonetheless, as volatility increases between the dollar and the peso, bitcoin may become an attractive method to send money over the border, especially if restrictions, such as requiring documentation to send money overseas, are placed.
On immigration, there hasn’t been much recent discussion on what Trump plans to do, but he has stated he will deport those who have a criminal record or commit a criminal offence. Beyond that, the most logical thing for him to do is to firstly stop new low skilled workers coming in by perhaps building the wall, then once the border is secured, legalize those residing in the country and sort of start over.
Very disappointingly, the press conference included nothing whatever about China, with reporters obsessed with a seemingly party political matter regarding Russia, even though how the relationship between America and China will develop is now the most important issue facing the entire world.
During the historical speech, which a million or more are expected to attend, tens of millions to watch live, and probably the entire world will briefly watch in the 5 seconds news segment, Trump will be free to choose his topic. USA Today says the speech will focus on national unity with references to “America First” and “Make America Great Again.” A very broad topic which might include general statements regarding China.
Tensions between the two countries have increased recently as Trump’s election has already had an effect on yuan which kept falling due to analysis that China’s economy will be weakened. That sent bitcoin’s price soaring, surpassing gold parity and reaching a new all-time high in all Chinese exchanges, until the empire struck back, drying up yuan’s offshore liquidity and opening an investigation on the three biggest bitcoin exchanges.
“The possible outbreak of a trade war between the world’s two largest economies, and retaliation from China including RMB depreciation, will cast a shadow over risk sentiment and put the [Yuan] under pressure,” Ken Cheung, Asian FX strategist for Mizuho Bank, told South China Morning Post.
America has a yearly trade deficit of some $600 billion with China. Trump thinks that’s because of yuan’s devaluation, protectionist measures by Chinese Authorities as well as the VAT implicit tariff. He has threatened to impose tariffs of as high as 45%, which would greatly weaken China’s economy. That, however, might be just a negotiation tactic.
In any event, bitcoin tends to react well to uncertainty. It has already climbed considerably and, after PBOC’s intervention, again rose in the last few days by almost $100 to near $900. However, there are concerns that a stressed China might act draconically towards the currency. The authorities there have already stated exchanges have violated the rules. Whether such violation will court punishment, whether China will instead only give a warning and set up a new regulatory framework, whether they will do either as well as effectively nationalize the exchanges or whether they fully close them down, remains to be seen.
The pound has been plunging, coinciding with a sudden increase in bitcoin’s price by $100. The United Kingdom might leave the European Union, including the free trading zone, completely. Trump, however, will probably offer them a very nice deal.
Of more concern to traders may be Trump’s behavior towards Germany. He has used them a few times in the same breath as China, recently seemingly using Merkel and Putin in the same sentence.
Trump has German ancestry, but Merkel’s outlook is not far from Trump’s ex-political opponent, Hillary. More substantially, Trump’s comments on NATO may require European countries to spend a lot more on their militaries, potentially slowing down their economies, which may mean a falling euro, higher inflation, leading to more diversification towards safe haven assets, including bitcoin.
However, America needs a strong Europe. The continent’s difficulties are more likely to be exacerbated from within, particularly as Italy may move towards seriously considering bringing back the Lira and leaving the euro. As might Netherlands.
Overall, the continent likely faces a period of transition and uncertainty with more Europeans probably diversifying their savings until a clearer picture emerges.
Some of what Trump has said about deregulation may already be priced in, as perhaps might be his tax stimulus and infrastructure spending. A picture has already emerged of an administration very friendly to this space, with the speech itself unlikely to shed much light on these aspects, but may indirectly affect the price based on broader high-level statements.
Of course, no one can quite predict what bitcoin will do, but it may react based on whether Trump’s tone has softened or whether he will move full speed ahead. Whether, now that he is President, he will strike a more reconciliatory tone, thus ease some of the tensions, or follow his chessboard by opening moves on many fronts, moves which will necessarily require a transition period of uncertainty, with winners and losers.
The former is unlikely to have much effect on bitcoin, but the later might further increase its use as a hedge.
Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.
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