Donald and the US Dollar in 2017

trump donald trump american flag republicLove him or hate him, he will be president come January 2017. We look at the likely impact on the Australian Dollar and its US counterpart.

Currency markets have had a wild week. The Australian dollar dropped 2 cents on Wednesday before making a mild recovery on Thursday. Meanwhile the Mexican Peso dropped off a cliff and looks prone to further volatility.

While markets calmed down following the result, analysts are frantically trying to work out what will happen next. Here are some of the key themes and potential impact on the Australian dollar.

 

Trump policies that take the Australian dollar higher (and the US dollar lower)

 

Protectionism – Almost immediately after winning the election, Trump turned his attention to China, branding them a currency manipulator. According to the Wall Street Journal, his commitment to sanction Beijing for its currency policy has been one of his most explicit and could ignite a trade war. Seriously taking on the Chinese policy would drag the US dollar lower and help support the Australian dollar or even push the AUD/USD up.

 

Debt – While Trump is clearly growth focused, where is the money coming from? If the U.S. government goes further into debt, it's ability to pay that debt could be questioned which would lead to a devaluation of their currency. While unlikely, this scenario would see the U.S. dollar decline and would take our currency higher.

 

Immigration – Right from his first speech as a candidate, Donald has taken an anti-immgration stance. This has played out in currency market with the Mexican Peso slumping to new lows following the election result. Over the longer term however, this stance could help weaken the US dollar in two ways. Firstly, with fewer arrivals to the country, there will be less demand for U.S currency. Secondly and perhaps less obvious is the flight of people, capital and money from the states as a result of this policy. This would have a negative impact on the US dollar and could support the Australian dollar exchange rate.

 

Trump policies that strengthen the US dollar and would mean a lower AUD/USD

 

Lowering Tax Rates – Lowering both company and personal tax rate was a key pillar during the election campaign. If Trump succeeds in dropping tax rates this far, there will be a flood of capital into the country, driving up demand for the US dollar and making it stronger.

 

Growth Agenda – In an insightful AFR article, Philip Baker points out that the growth policies outlined by Trump will come with inflationary side effects which will drive up U.S. interest rates. Higher U.S. interest rates are one of the key drivers of a stronger greenback and could suppress the AUD/USD exchange rate.

 

Uncertainty – In times of uncertainty, currency markets can be volatile. In recent times, it has also seen the US dollar move higher and the Australian dollar. This “risk-off” move comes as investors and traders buy U.S. dollars because it is seen as a safe-haven option.

 

For now, uncertainty rules

With so many conflicting forces and so many potential outcomes, the future looks anything but clear. Last week's volatility could be a sign of what we can expect in 2017 when Donald Trump takes office.

 

 

 

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