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FX Update : Trump election win propels the greenback

Written by Ian Dobbs on November 15th, 2016.      0 comments

The prospect of generous tax cuts, elevated government spending on infrastructure and defence and a drive to reduce regulation by the incoming Trump government in the US has ignited the US dollar in recent trade. The move comes as investors eye the likelihood of higher inflation and boosted productivity/growth under the new policy impetus as they eventually gain traction. The Trump win has seen market pricing move to an 85% probability being placed on a Fed hike in December, although the potential exists for many further hikes in 2017/18 should investment markets remain stable and should the policy initiatives have the desired effect. Look to Fed Chair Yellen’s testimony on Thursday for any clues of the Fed’s thinking on the fresh developments and the likely trajectory of policy tightening, although in reality it is far too early in the piece for the Fed to have any strong idea on what will likely eventuate given the lack of clarity around likely policy developments.

Local news took a backseat last week as market focus centred on the gripping US election which saw Donald Trump win the race to be the 45th President of the United States. The surprise victory has seen the US Dollar lift strongly (at the expense of currencies like the AUD) in recent trade on the prospect of higher inflation if Trump moves to implement his policies of large tax cuts and heavy infrastructural spending. There was little domestic news in Australia last week to get the market excited. Housing finance which rose unexpectedly in September was driven by strength in lending to investors. ANZ jobs ads rose by 1%, although the latest business and consumer confidence indicators eased slightly to remain marginally above or around their long term averages. Offshore focus will again play a dominant role in trade this week. Locally look to the RBA minutes today and employment on Thursday for direction as wage prices tomorrow create no more than a passing interest.

New Zealand
It has been an eventful last week for the NZ Dollar which at one point sat 4.5% lower off last week’s highs against the greenback in trade overnight. Dominating the news was the surprise win by Donald Trump in the US election which has seen the greenback jump in trade in recent days on the prospect of (inflationary) US tax cuts and infrastructural spending. Further selling pressure in the local currency came last week on the back of a RBNZ cut in the cash rate to fresh lows of 1.75%. Commentary which indicated willingness for intervention to weaken the strong NZ Dollar and to further reduce the cash rate should it be necessary, added to the tone. Dominating the news locally this week has been yesterday morning’s large magnitude 7.5 earthquake in the upper south island. The quake ushers in the prospect of additional billions of NZ government spending in order to restore the damaged infrastructure and housing, although PM John Key has been quick to calm the markets by highlighting the current strong NZ fiscal position. GDT dairy price data tonight is the main local event scheduled this week.

United States
The prospect of a large expansionary fiscal push in the wake of last week’s Trump win in the US Presidential election has continued to propel the US Dollar higher in trade this week. The move occurs as the market prices in the prospect of higher US rates (current December hike probability is priced around 85%) and future inflationary pressures on the back of the new policies. This has seen US 10yr yields reach 11 month highs and post gains of nearly 1% from the lows reached a few months ago. Data released last week included a decline in jobless claims and a small rise in business optimism. Mortgage delinquency rates for US households which fell to lows not seen since 2006 come as bank lending standards to households reportedly ease. Michigan consumer sentiment jumped in November and 5-10 years inflation expectations rose to 2.7% from 2.4% previously. Focus this week includes talk from various Fed speakers (including Yellen on Thursday), retail sales (today) and inflation on Thursday.

United Kingdom
The gripping US election which formed a key focus in the UK last week came as a welcome relief for many in the wake of the prevailing negative sentiment which has surrounded the UK in the wake of the EU exit vote. The sterling was the only currency we cover to post gains against a strong greenback which rallied on the prospect of higher tax cut and spending driven future US inflation under the Trump presidency. Looming inflation in the UK in the wake of the sterling’s recent drop which has ushered in a potentially more favourable BoE policy backdrop has also provided relief. Data last week included a rise in the latest monthly manufacturing growth and small drop in industrial production. Halifax house prices rose, although the September trade deficit widening was larger than expectations. This week is set to be busy as we receive numbers on inflation and the BoE’s Carney testimony on the November inflation report (today), employment (Wednesday) and retail sales (Thursday).

The Euro has hit fresh lows for 2016 in trade overnight on the back of the continued strength in the greenback which has gained further as it built on last week’s gains after the surprise win by Donald Trump in the US Presidential election. The moves reflects the focus on the stark policy divergence between Europe and the US, especially in the wake of Trumps win that looks likely to usher in higher US rates and inflation on the back of proposed generous tax cuts and higher government spending on infrastructure and defence. Data from Europe last week which was low impact included an unexpected decline in German factory orders and disappointments in German industrial production and trade. German harmonised inflation which rose at a modest 0.7% year-on-year was in line with expectations. Eurozone industrial production released yesterday and retail sales (last week) both eased by less than expectations. GDP data and ZEW economic confidence indicators form the focus for today, whilst later in the week we get numbers on eurozone inflation and a speech from ECB President Draghi.

The sharp decline in the Yen against the US Dollar has continued in trade this week. The move has now extended to over 7.25% (from its highs) in the wake of the Donald Trump’s surprise win in the US Presidential election last week. The result has bolstered the greenback on the back of rising US inflation expectations as a result of Trump’s proposed tax and spending policies. Local data last week included numbers on wages growth which remained weak in September and machinery orders which fell by more than expected. Bank lending and the Eco Watcher’s economic confidence index rose by more than expectations and corporate bankruptcies declined by 8% in the year-on-year. This week started with third quarter GDP (+2.2% y/y) and industrial production numbers yesterday which easily beat expectations. Comments from the BoJ Governor Kuroda included an urging to companies to lift wages in line with the bank’s sustained 2% inflation target (labour cash earnings rose only 0.2% y/y last week).

Focus for Canada last week was on the implications for the Canadian economy after the surprise win by Donald Trump in the US Presidential election. One of Trump promises on the election campaign trail was to pursue fairer trade in order to protect US jobs. As President, Trump would have the authority to repeal NAFTA if the terms of any renegotiation aren’t to his liking. Canadian exports to the US under NAFTA were US$325 billion in 2015. Other news included continued weakness in oil prices after the IEA warned of supply growth into 2017 and local data which included housing starts and new house prices which came in around expectations. Building permits fell by more than expectations however (7%), and came largely on the back of a sharp 22% fall in non-residential permits. In focus this week are manufacturing sales tomorrow and October inflation on Friday.
Economic Events.
  • German Factory Orders s.a., -0.6% m/m vs. 0.3% exp. (Sep.)
  • Australian NAB Business Confidence, 4 vs 6 prior (Oct)
  • UK Manufacturing Production, 0.6% m/m vs. 0.4% exp. (Sep.)
  • Canadian Building Permits, -7% m/m vs. -5.6% exp. (Sep.)
  • Japanese Machinery Orders, -3.3% m/m vs. -0.8% exp. (Sep.)
  • Australian Home Loans, 1.6% vs. -2.0% exp. (Sep.)
  • NZ Cash Rate, cut by 0.25% to 1.75% as exp.
  • German Harmonised Inflation, 0.2% m/m as exp. (Oct.)
  • US Michigan Consumer Sentiment Index, 91.6 vs. 87.5 exp. (Nov.)
  • US Initial Jobless Claims (Nov 4), 254k vs. 260k exp.
  • Chinese Inflation, -0.1% m/m v. 0% exp. (Oct.)