January 26, 2018

Currency War and tax Peace.

Management comment

Although the week began with the temporary resolution of the shutdown in the US administration (until the next scheduled meeting between the Democrats and the Republicans on 8th February), forex trends drove the markets last week. The declaration by Steve Mnuchin regarding the positive effect of a weak dollar propelled the greenback to 1.25 vs the euro without triggering any real cause for concern for Mario Draghi given the strength of the European recovery.

A long position in the yen (one of the last weak currencies against the euro and dollar among the major liberal economies) could be an investment idea in the forex market, which may continue to weigh on equity markets and earnings forecasts among major companies. In parallel, all countries across the board (led by the US and also France) have instigated tax cuts for companies and the wealthiest households in order to attract international capital inflow and have rekindled fiscal rivalry. The positive consequences of massive tax cuts on the economy (trickle-down theory) may be partially offset by the relatively disastrous effects of budgetary deficits, the current drawback impacting the Anglo-Saxon capitalist model (US and UK).

Taxation as a means of redistribution and economic efficiency is not a new theme. In 1768, taxation was the key theme of the fable entitled The Man of Forty Crowns by the philosopher Voltaire. The author suggests that the best type of tax possible would be based on intelligence, as everyone would then accept paying out of pure vanity. Currency wars and fiscal peace currently represent the new danger looming from Donald Trump’s electoral promises: resurgent protectionism.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in January 26th, 2018.

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Although the week began with the temporary resolution of the shutdown in the US administration (until the next scheduled meeting between the Democrats and the Republicans on 8th February), forex trends drove the markets last week. The declaration by Steve Mnuchin regarding the positive effect of a weak dollar propelled the greenback to 1.25 vs...
2018-01-26