The Pound to Australian Dollar exchange rate surged higher by nearly 3% in Asian trade but has since pared back those gains as a Trump victory is confirmed.
Donald Trump is the new President-Elect of the United States of America.
The victory came despite the odds being stacked against the Republican candidate and confirms the markets were caught wrong-footed as they were with Brexit.
The Australian Dollar alongside the other commodity dollars was one of the most notable losers of the shock as global foreign exchange markets and commodity prices retreat.
However, it appears the lessons of the Brexit foreign exchange move have been learned and the recovery reversal has been faster this time around.
The Pound to Australian Dollar exchange rate rocketed higher to reach 1.6554 at one stage - the first time it had reached these levels since the flash-crash.
The Australian Dollar fell sharply against the US Dollar to reach 0.7630.
The Euro meanwhile rocketed to reach 1.4725.
Societe Generale's Stephen Gallagher gives his key points to consider of a Trump presidency with a Republican Congress:
- A clean sweep. Republican party not cohesive, but no gridlock either.
- Trump’s tax cuts vs Ryan balanced budget views.
- Uncertainty to calm
- Choice of key cabinet positions can calm or stir markets
- Inauguration day is Jan 20th. Transition team to work right away
- December rate hike fades. Will be a balance of economic data (pro hike) vs the financial market turmoil and Trump uncertainty. We can see a delay immediately, with more moves in 2017-18 on basis of tax cuts.
- Mid-west or Rust belt surprise– retreat from globalization
- The surprise votes came from the mid-west – Michigan, Wisconsin and Pennsylvania. These are traditionally heavy manufacturing states. Implicit in their vote is a demand for change. Trade and the belief they have lost out to global trade may be a key factor behind their vote for Trump. This will factor into Washington policy. Over time, this can be negative for the full US economy, but mostly stretched over longer periods of time.
Australian Dollar Still Outlook Positive
The Pound had started to lose ground against the Aussie Dollar once more following the publication of the RBA’s statement on monetary policy released on November 4th.
Sterling has been in the ascendency since late October with the support level at 1.5920 proving to be a level below which GBP/AUD refuses to tread.
The recovery bounce almost touched the round figure of 1.64 but the rally ultimately could not be sustained.
The failure of the rally coincided with the release of the RBA's policy statement in which markets quickly digested an upbeat tone that hinted at little chance for further AUD-negative interest rates cuts being delivered in the near- to medium-term.
Of note was the assessment of the Chinese market where the downside risks to growth were deemed to have faded.
The RBA notes an increase in the demand for bulk commodities at the same time as the Chinese authorities have
restricted domestic production of commodities to reduce overcapacity.
"This has contributed to a pick-up in bulk commodity prices and has been associated with a broad-based increase in producer prices in China," say the RBA.
The rise in commodity prices this year has resulted in an increase in Australia’s terms of trade as Australia's key exports to China are iron ore and coal. This is expected to provide support to the Aussie economy going forward, and by extension the AUD.
Threats to the Australian Dollar's Chinese Commodity Boost
While the outlook for Australian exports has certainly improved, many are arguing it is not time to pop the champagne.
For one, recent Chinese FX Reserve data has got markets jittery.
The data has shown a record $45.6bn fall in China’s foreign exchange reserves which was more than the sum of the two previous month’s declines put together (August’s $15.9bn and September’s $18.8bn).
The acceleration in the decline in reserves is due to the Peoples Bank of China (Pboc) using the FX to stem the depreciation of the Renminbi, by buying it in market interventions.
The Renminbi has weakened to six-year lows versus the dollar and this trend has led investors to pull their money out of China in increasing numbers so as to avoid asset depreciation.
Rising capital outflows have further exacerbated the currency devaluation since the outflows involve further selling of the Renminbi.
This, in turn, is exacerbating the Chinese currency’s decline by causing a negative feedback loop.
The question is, whether this is likely to impact on the advantages currently enjoyed by Australian exporters?
The simple answer is that it probably is not.
The worst thing for Australian exporters and the appreciating Aussie, would be for the Chinese authorities to lift the cap on domestic supply of raw materials, however, it is unlikely to do so since such a move would cause immediate deflation.
This would impact on growth and require the Pboc to remain accommodative, which in turn would speed up the devaluation of the Renminbi and the resulting phenomenon of capital flight.
As such we think it unlikely the authorities will remove the cap on domestic supply.
Another threat to the Aussie would come for the Chinese housing market slowing down since many of the raw materials and other exports from Australia are used in the building trade.
However, Nordea Bank’s Aurelija Augulyte thinks the sector still has further to go:
“China still is in a cyclical upswing. The manufacturing PMI just hit the highest level since summer 2014, industrial profits and producer prices picked up, and while the housing market looks hot, there are still indicators suggesting that there is further room to go,” she remarks in in a recent note.
As far as commodities go, the Nordea analyst sees the potential for an upswing due to oil finding robust support at the 200-Day Moving Average, where it is highly likely to bounce and possibly reverse.
“And if it is true, commodities should keep enjoying the tailwind - this also concerns the oil, which hit a major support area last week, and should bounce,” said Augulyte.