Strategists have their say on what Donald Trump will do to the Australian dollar

Photo: Scott Barbour/AFL Media/Getty Images

It’s been a crazy 48 hours for the Australian dollar.

On both Wednesday and Thursday, the AUD/USD traded in a more than 2% range, a period of volatility not seen since the UK Brexit referendum, and result, seen in late June.

However, for all the volatility, the Aussie has held up pretty well all things considered, partially as a result of traders not being sure of what exactly a Donald Trump presidency will mean for the global economy.

One view is that his pro-growth domestic policies will help to support commodity prices, something that the Aussie clearly benefits from given out vast mineral wealth.

On the other hand as a currency that’s reliant upon the performance of the global economy, particularly China, some of Trump’s controversial pre-election trade commitments, including raising tariffs on Chinese exports, clearly poses a risk to the outlook for our largest trading partner.

And then of course there’s the risk of higher interest rates in the US, eroding the Aussie’s yield advantage, a clear supporting factor in terms of attracting foreign capital flows.

This tug-of-war between positives and negatives has been witnessed first hand over the past two days, with upward momentum one moment quickly replaced by downside pressure the next.

Markets, be they traders, businesses, governments or travelers, are all now pondering where the Aussie will head next?

It’s a question that many strategists have been pondering too, perhaps prompted by the vast amount of interest that we’ve also seen first hand.

After having time to digest the election result, and revisit trump’s proposed policies, the research notes are now flooding in thick and fast detailing where they think the Aussie is heading.

Here’s just a collection of some of the notes we’ve seen, detailing the Aussie’s outlook:

Sean Callow, Westpac

AUD/USD narrowly took out the August highs this week, reaching 0.7778 in anticipation of a Hillary win. The Trump-driven selloff reached 0.7580 before steadying in the familiar mid-0.76s. The price action was less dramatic than on Brexit day, even though Trump’s focus on Asia trade surely means greater direct impact on Australia’s economy.

This suggests that the support AUD enjoys from sharply higher commodity prices now compared to June is not fragile. Doubts remain over sustainability yet the gloomy baseline predictions for coal and iron ore at end-2016 can be pushed into 2017.

So long as the wages and jobs data doesn’t stir RBA rate cut talk, the commodity rally should help AUD/USD find buyers near the 100dma at 0.7590, while being capped in the 0.7750/75 region given the doubts over Trump’s plans for Asia.

Daniel Been, ANZ

The US election result will have a lasting and negative impact on the AUD, but it will take some time to understand the scale of the risk as uncertainties about how much President Trump’s policies will differ from Nominee Trump’s rhetoric remain.

What we did learn during the campaign was that he has a much less compromising style in geopolitical diplomacy relative to that of the Obama administration and a more protectionist slant to global trade policy. If these traits follow him into the White House, then it is unambiguously bad for Australia, and for the broader Asian region at large. However, these risks will likely take a while to manifest. The first test of his presidency will be whether he follows through on his threat to name China as a currency manipulator.

The final risk to the AUD comes via the USD leg. To date, all indications are that we will see a shift in the policy mix in the US. A Trump administration is likely to favour a more expansionary fiscal stance for the US relative to continued monetary largess.
This is generally seen as supportive for the USD given that a further boost to growth could see US economic outperformance come to the fore. At the same time, a helping hand from another arm of policy could lead to a more confident Fed. Historically, a tightening in monetary policy, when accompanied by looser fiscal policy, has been a boon for a currency.

Given all of this, we think that downside risks for the AUD have risen at the margin because of this result. As such, the range in the AUD (0.72-0.78) likely remains intact for now, and our near-term forecasts, which reflect this range, remain appropriate.

Elias Haddad, CBA

Shaky financial market risk sentiment and the prospect for a more hostile approach to trade following Trump’s victory suggest commodity-sensitive currencies like AUD, NZD and CAD are vulnerable to more downside versus the USD

In late September, we originally anticipated AUD/USD could decline by up to 10% over a twelve-to-eighteen month period under a Trump Administration because of a stronger USD. We now expect AUD/USD to fall by roughly 5% because AUD is likely to receive support from higher commodity prices, an improvement in Australia’s terms of trade and a narrower current account deficit. Granted, commodity demand from China will likely slow, as we anticipate China’s economy to decelerate at an annual pace of 5.5% from 6.5%. Trump is looking to label China as a currency manipulator and impose a 45% punitive tariff rate on all Chinese imports.

However, slower commodity demand from China should be offset by stronger US commodity demand driven by faster US economic growth. We also believe that the decline in the AUD will reduce the chances of additional RBA rate cuts.

The prospect for a stronger USD will continue to weigh on AUD/USD. But we doubt AUD/USD will sustain a move below 0.7300 over the next twelve-to-eighteen month.

Michael Turner, RBC Capital Markets

The AUD/USD has traded a pretty tight range (0.7400–07800) since March except for a weaker patch around mid year. We see little reason near-term for it to deviate out of this reasonably well-established range on the Trump developments over the last 24 hours, but the bias to the currency from these developments is probably lower both near- and medium-term.

Immediate focus on a more pro-growth US policy bias should lend some support to the USD, with expectations of Fed action and modest policy normalization a little firmer. Longer-term, increased discussions around trade access and arrangements have the potential to bode more poorly for global growth and commodity-oriented currencies such as the A$, especially if the focus centres more upon China.

While this will dominate discussion near-term, we believe a number of other reasonably supportive factors for the currency that have building in the backdrop for some time and will likely continue to linger: firmer bulk commodity prices/rising terms of trade, mixed domestic data, and a sidelined RBA.

Nevertheless, the risk to our end-2016 and end-2017 forecasts of 0.7900 and 0.7200, respectively, is to the downside.

Like the price action seen in recent days, there’s a lot of uncertainty. If there’s one common theme, though, it’s that the risks appears to be skewed to the downside.

The AUD/USD currently buys .7595.

AUD/USD 5-Minute Chart

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