FX BEAT: A$ could be biggest loser from a Trump win

The Australian dollar is the most sensitive of the world’s major currencies to global growth, trade policy uncertainty, and higher U.S. bond yields, and as such could be the biggest loser if Donald Trump wins the U.S. Presidential election on November 5.

Westpac’s FX strategy team sees potential downside of around 3 per cent for the Aussie currency against the U.S. dollar based on outcomes seen in Trump’s first term in office, including a 40-basis-point jump in U.S. real yields in the first month after his victory. 

“The USD is likely to initially appreciate if Trump wins,” Richard Franulovich, Head of FX Strategy at Westpac Institutional Bank, says in a research note.

“Trump’s core positions on tax cut driven fiscal stimulus, tariffs and isolationist foreign policy create upside USD potential via multiple channels: a looser fiscal/tighter monetary policy mix, trade policy risk and geopolitics.”

Markets are not complacent about the risks of a Trump win, Franulovich says, but the tightness in the polls means there is considerable uncertainty about the outcome which will likely translate to “substantial price swings” once the result is known. 
 

The biggest risk for the Aussie is Trump’s plan to slap punitive 60 per cent tariffs on China’s imports into the U.S. As Franulovich notes, tariffs generally work to strengthen the currency of the country imposing them.

The Aussie is also vulnerable to broader global trade disruption that Trump’s tariffs could herald, given that Australia has the highest direct export exposure to China (8.9 per cent of GDP) than any other G10 nation. 

If Kamala Harris wins, trade policy will likely follow a similar trajectory to the Biden administration – maintaining Trump-era tariffs and applying them selectively in certain strategic areas, such as EVs and solar panels.  

The other big risk for the A$ is a potential spike up in U.S. yields on a Trump victory, with his tax cut agenda projected to have a 10-year net deficit impact of about US$7.5 trillion - more than double the forecast impact of Harris’ policy plans.

However, Franulovich adds that while Trump’s fiscal plans are more expansionary, the bigger risk is that either party sweeps both houses on Capitol Hill. 

“Regardless who wins, a sweep creates a wider berth for spending by the governing party, implying a larger fiscal risks for yields.”

Higher U.S. yields will tend to attract more international capital flows into the U.S. dollar for the better returns on offer in relation to other currencies. 

Beyond an initial drop in the A$ on a Trump win, Franulovich says the longer-term outlook is potentially more favourable. 

In the seven weeks after Trump’s win in 2016, the A$ dropped 6 U.S. cents against the greenback, but had recovered all those losses and more in 2017 as Trump focused on getting his tax plans through. 

The A$’s decline resumed in 2018 when Trump turned his attention to a trade war with China, and the Federal Reserve was in rate hike mode. 

“Trump’s 2016 tax cuts are due to expire at the end of 2025, arguably making them more of a priority than tariffs. If so, the A$ could conceivably outperform on a range of crosses if the early focus is on risk-friendly tax-cuts and underperform later on tariffs,” Franulovich says. 

To read Richard’s note in full, visit WestpacIQ. (Subscription required)

See also: Trump vs Harris: what it means for the Australian economy