AUD and NZD driven by Trump - Westpac

Research Team at Westpac, suggests that the dominant feature of global markets in the wake of Donald Trump’s election win has been higher US yields and stronger USD and this has seen Asian currencies on edge in recent weeks, in turn weighing on AUD, despite the ongoing strength in commodity prices.

Key Quotes

“Now, we do expect USD to remain well supported through 2017, with supportive tailwinds of higher yields, potential Homeland Investment Act (II), a more hawkish composition to the Fed’s Board when Trump fills two vacancies, and continued EUR weakness. This referendum is one of a series of key political events in Europe that will continue to see EUR trade heavily, and maybe even through parity over 2017. So regardless of the referendum outcome itself, it adds to the arguments for EU tail-risks and EUR weakness.”

“AUD is currently trapped between two strongly opposing forces – on one hand US led reflation following Trump’s victory and stronger commodity prices, on the other hand fears over further Asian capital flight and China devaluation in the face of a Trump led impact on tariffs and global trade. At the moment we believe that AUD’s role as an “Asia hedge” is dominating, and keeping it below our fitted fair value measure.”

“So, to the extent the Italian referendum keeps markets focussed on populism and anti-globalisation thematics as well as keeping volatility higher and EUR weaker, then in that regards it may continue to weigh on AUD and be another factor keeping it below our estimated fair value.”

“For NZD, the story is similar. The NZ backdrop is broadly positive, but this is currently being outweighed by the strong USD and fears around Trump’s impact on global trade. Again, if this referendum reinforces anti-establishmentarianism, then it could add to a technically poor outlook and NZD undervaluation.”

“For fixed income, we do see the chance of a “safe haven” bid should the “No” vote prevail. Yields have been pushing sharply higher since the US election on Trump’s reflation policies and somewhat ignoring potential risks to global trade and growth. Again, should the referendum see markets focus on EU tail-risks as well as populism, nationalism and rising risks to global trade, then it would add to currently oversold conditions and see at least some stabilisation in yields ahead of December’s important Fed and ECB meetings.”