Last Friday, barely more than 24 hours after Donald Trump was elected as the next US President, both the Singapore Dollar (SGD) and the Malaysia Ringgit (MYR) depreciated significantly against the US Dollar (USD).
Graphic: Dollars and Sense
What's happening? Isn't it supposed to be the other way around?
The popular sentiment was that the USD would be in trouble after Trump was elected President. It was assumed to be similar to Brexit earlier this year, when the UK Pound depreciated against most major currencies following the unexpected results of the Brexit vote.
In actual fact however, Trump's victory in the election didn't mean that the USD was going to decline.
Rather, what it actually threaten to do, and did indeed do, was to increase the level of volatility for the financial markets and Foreign Exchange (Forex) market. It increases the size of any changes, rather than to dictate the direction of it.
In our first published article after Trump's win, 8 Things Singapore Investors Need To Know Right Now, one of the key points we raised was that Singaporeans needed to "watch the US$ closely".
That indeed has proven to be the case as shortly after, the USD started appreciating against many Asian currencies including both the SGD and MYR.
Why the USD appreciated?
The expectations for now are that Trump's policies could lead to additional infrastructure projects within the US economy, and hence increase the amount of domestic investments.
These projects are likely to lead to two things for the US market. Firstly, it increases the demand for the USD, as projects would need to be funded mainly by USD. Secondly, it may also increase inflation in the US economy.
With all things remaining equal, both of these would lead to higher interest rate, further increasing the demand for the USD.
Also, the protectionism approach that Donald Trump takes may lead to an increase in business operations among US corporations within country itself, thus further increasing capital inflow.
Do note however that these are expectations that people have based on what they think Donald Trump would do. Nobody knows exactly what Donald Trump would end up doing, and we suspect, not even Donald Trump himself. Why Asian Currencies Depreciated?
While there are some reasons for people to be optimistic about the USD, even if they don't necessarily agree on the approach of it that Donald Trump is going for, the same cannot be said for most other markets in Asia, particularly emerging markets.
Hillary Clinton as President would have been the safer option for many Asian countries, since she previously served as Secretary Of State for Foreign Policy under the Barack Obama administration from 2009 to 2013.
Donald Trump on the other hand represents much uncertainty in the foreign policies space. His campaign approach focused a lot on how he wants to make America great again, at the (possible) expense of many foreign trade policies that he felt have not benefitted US citizens as much as they have done for other countries.
If you take what Donald Trump have said about foreign policies (e.g. "It's not free trade with China; it's stupid trade") literally, then you should be worried for Asian countries that rely heavily on US trades.
And even if Donald Trump doesn't end up doing what he says (maybe he gets distracted with something else domestic), there is still no reason to feel optimistic. The way we see, it's status quo at best, and a decline in trade and possible capital outflow for Asian economy should the worst happens.
MYR depreciating against SGD has nothing to do with Singapore or Malaysia, but everything to do with the US
Emerging markets are more likely to be affected by any global slow down compared to developed countries. That is one of the reasons why the MYR have depreciated more against the USD, compared to the SGD.
And because currencies are always interrelated, the MYR also depreciates against the SGD, even as the SGD depreciates by a smaller amount against the USD.
On November 9, the exchange rate for the SGD/MYR was between 3.03 to 3.04, a rate we are used to seeing.
However on November 10 to 11, the exchange rate started climbing till it reach a stunning level of 3.19, that is, S$1 = RM3.19. It has seen declined back to lower levels of 3.07 (at the point of writing), but we suspect this is an area worth keeping an eye out on.
The US may still be OK, but not the rest of Asia
The US is a much bigger market. So while we may think that Donald Trump's policies will not help its people in the long run, it's likely that they can still adequately support themselves and even show growth. The same however cannot be said for many Asian countries that are heavily reliant on US trade for growth.
Donald Trump may not be right, but he may not be wrong either.
And because Forex is a zero-sum game, when an appreciation for one country will mean depreciation for another, it seems likely that the electing of Donald Trump as President will affect the growth of foreign countries more than it actually affects the US.
DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.