Asia's Trump slump hurting AUD – Westpac

Sean Callow, Research Analyst at Westpac, notes that the Aussie dollar has now lost about 3 cents since the US election, so perhaps their 0.73 forecast on a Trump win was not too pessimistic after all.

Key Quotes

“Headlines about a burst in US infrastructure spending are starting to wane, which is probably sensible, given how distant any such spending would be. Still, markets are increasingly confident that the Fed will raise rates in December (90% priced). And US Treasury yields remain well above pre-election levels, with sharply wider budget deficits in prospect.”

“This is already having an impact on the outlook for the US housing market. Whereas Australian mortgage rates usually don’t move much without the RBA changing the cash rate, in the US the benchmark 30 year rate is sensitive to long-dated Treasury yields. This rate has leapt 40 basis points since the election, even though the Fed has not touched the funds rate. If such rates persist, the FOMC will have to consider such market-driven monetary tightening in its 2017 outlook. The USD surge will also be a factor in the degree of confidence the FOMC has that inflation is on track to reach the 2% target.”

“This week RBA governor Lowe said a surge in protectionist trade policies is “probably right at the top of the list” of things he worries about. Protectionism was the foundation of Trump’s economic campaign so this remains a danger for US trading partners including in Asia and thus for AUD. But nearer term, the turmoil in Asian currencies is probably more due to the surge in US yields, in price action reminiscent of the Q2 2013 “taper tantrum” (Fed talking about reducing QE).”

“All Asian currencies are weaker since the election and the scramble by policymakers to deal with capital outflows is likely to continue for some time. Chinese policymakers have also taken steps to cool commodity speculation. This is a difficult combination for AUD and NZD near term, chipping away at still broadly positive domestic fundamentals.”