In his first few days as the 46th President of the United States, Biden introduced 30 executive actions. His initiatives primarily aim to help get the US economy back on track, tackle the pandemic, instate green initiatives, and remedy international relations. Biden seems intent on helping the country preserve its status as a world superpower in the international community, signalled by rejoining the Paris Climate Agreement and the World Health Organisation.
We look at how the world’s financial markets, particularly the North American currencies, such as the US dollar, Canadian dollar and Mexican peso, have responded and could react to leadership and policy changes in the United States following Biden’s inauguration.
When we look at Crude oil imports for the United States, this commodity is imported mainly from its neighbour to the north, Canada. 37.1% of the United States crude oil imports are purchased from Canada, which is an impressive 3 million barrels per day and based on the current price range of US$62 per barrel, the daily turnover of this relationship touches US$200 million per day. Understandably, this trade relationship creates a healthy demand for Canadian dollars.
The Keystone Pipeline is an oil pipeline system originating in Alberta, Canada and transporting oil to various hubs in the United States. The pipeline was commissioned in 2010 and has been extended through multiple phases of development. The latest proposal to extend the pipeline was through an initiative called Keystone XL. It would increase the existing capacity by 830,000 barrels per day by introducing wider diameter pipes taking a shorter route. The higher throughput would help Canada deliver more oil to the USA’s Gulf Coast for export to foreign trade partners.
According to the US State Department, Canada and the United States are each other’s largest trading partner. In 2019, the two countries traded goods and services worth US$725 billion. To give an example of the significance of this relationship to Canada, according to OEC data, in 2018, 72.8% of Canadian exports were destined for the US. 27% of which were petroleum products and 51.5% of Canada’s imports originated in the US.
Let’s take a step back and look at the sheer volume of Canadian oil being exported to the US on a daily basis. It’s easy to see the massive demand for Canadian dollars that this trade relationship creates. If the Keystone XL pipeline project was implemented, the increased capacity to export oil either to the US or via US distribution channels would have added to the demand for Canadian dollars. The fate of the Keystone XL project remains unclear. If the project goes ahead, the North American currencies most affected will be the USD/CAD pair.
As Biden became President, he elected Janet to Yellen to join his cabinet as the Secretary of the Treasury. Yellen is a familiar face. She was the Federal Reserve’s former chairwoman, the United States central bank, which holds significant influence on the country’s and even the world’s financial decisions. With Yellen in her new role, we can expect she will draw on her previous experience as chairwoman of the Fed to help steer the United States fiscal policies.
Some of Janet Yellen’s initiatives include going big on stimulus initiatives, which is demonstrated by the recently passed $1.9 trillion American Rescue Plan stimulus package that pumps billions of dollars to schools, vaccine distribution, testing & tracing, tax credits and direct payments to Americans.
One of Yellen’s first actions was pushing a US$1.9 trillion stimulus package, with a total of US$1 trillion being given to households and the remainder going towards several other initiatives. This is all part of a COVID-19 relief package, which includes a $1,400 stimulus check being handed out to eligible Americans. Also included in the relief bill is increasing the federal unemployment benefit from $300 to $400 per week. The additional unemployment program is extended to the 29th of August 2021.
Keep in mind this is the latest in a series of large scale stimulus packages the US government pumped into the economy.
The monumental stimulus packages are causing fears of uncontrollable inflation, which could weaken the US dollar against other major currencies.
The trillions of dollars of stimulus are going to have to come from somewhere. One of Yellen’s initiatives is to increase income tax on those who earn over US$400,000 a year. Income tax isn’t all that’s due to be raised. Yellen suggests corporate income tax should be increased from 21% to 28%. During the Trump administration, the former President lowered corporation income tax from 35% to 21% in 2017. To maintain competitiveness in the US market, Yellen suggests she would like to cooperate with other nations in a coordinated approach to prevent companies from seeking low tax jurisdictions for the sole purpose of paying less tax.
COVID-19 has had the most significant impact on the United States economy since 2008. Yellen is considered to have a dovish outlook of fiscal policy, meaning she thinks low unemployment more pressing than low inflation. Yellen is expected to work closely with Jerome Powell, who succeeded her as the Federal Reserve Chair, to continue supporting markets. Powell has already stated interest rates have close to zero chance of being increased before 2023.
Yellen has been an outspoken opponent of decentralised cryptocurrencies like Bitcoin and voiced her opinion on many occasions. It’s unlikely Yellen will change her tone as the Federal Reserve is exploring the option of its own central bank cryptocurrency.
According to Mexican President Andres Manual Lopez, President Biden has stated that his administration would offer US$4 billion to help with the development in Honduras, El Salvador and Guatemala. Mass migration is taking place at an alarming rate. Immigrants are making their way from these countries through Mexico to reach the United States. The purpose of the investment is to address the root causes of mass migration and help Mexico reduce the strain on itself for suppressing illegal border crossings to the United States.
The construction of the US-Mexico border wall, initiated by Trump, was terminated with immediate effect. The Biden migration seeks to address the issue of mass migration through more humane approaches and offer a path to citizenship for undocumented workers instead of pushing them into underground economies.
Suppose the burden on Mexican authorities can be reduced. In that case, it will theoretically allow public spending to be diverted to initiatives that help boost the economy, leading to appreciation in the Mexican peso, thus lowering the USD/MXN price.