President Trump: Implications for currency markets - Westpac

Research Team at Westpac, suggests few implications on the major currency pairs of the Republican clean sweep.

Key Quotes

A$: We have maintained the view that the A$ and NZ$ would likely see similar falls on a Trump victory to what we saw over the UK referendum. Indeed, it seems fair to argue that we should see more aggressive falls in the A$ given Trump’s stance on China, trade and tariffs etc. A deterioration in relations between the US and China could destabilise Brexit -weakened east-west trade even further. A sharp deterioration in in US/ Chinese relations could up-end commodity markets too. We see risks of A$ trading down to and through 0.74 as we strive for a better understanding of Trump’s stance on China.

NZD: NZD/USD reversed sharply lower, from 0.7395 to 0.7275, at around 2pm NZT when the unfolding election results started to swing towards Trump. That 1.2c turnaround is less than the 3c day turnaround on the Brexit vote, but there’s plenty of time for the reaction to extend today and longer term. There’s minor support at 0.7265, but major support not until 0.7035. The NZD will follow the lead of risk sentiment indicators such as equity markets in the near term, but longer term will be sensitive to the impact on global trade.

USD/JPY: The last couple of days had seen increasing confidence surrounding Clinton’s position and thus a market becoming positioned long on ¥ crosses e.g. AUD/JPY well above its 200 day moving average and EUR/JPY testing key resistance at 116/116.50. Trump’s victory has therefore generated a sharp reversal. With a heavy run of risk events into the Dec 14 FOMC meeting including the Italian Senate referendum (Dec 4), the Brexit Supreme Court Challenge (commencing Dec 5) and the ECB meeting Dec 11, there are a number of reasons to expect this weakness to continue. Clearly, the market based probability of a Fed hike has slumped too. So we see this move continuing and USD/JPY pushing to and through 100.

EUR: The EUR is likely to continue its path towards 1.14/ 1.15 in coming weeks. The Fed is unlikely to hike in Dec, as financial conditions tighten and uncertainty in key areas of the US economy takes hold. Fed officials are likely to await evidence that the US economy is "weathering" the near term uncertainty of a Trump presidency. However, the possibility of no vote in Italy and a possible political crisis will likely weigh more heavily on traders mind after the shock Brexit and Trump outcomes. Thus gains in EUR beyond that 1.14/1.15 level should be firmly capped.

GBP: The initial impact on GBP from is that of position adjustment. GBP shorts have been a favoured position, especially of leveraged funds since the Brexit vote. That now looks set to change. Uncertainty is a great driver of markets and what we have seen today is uncertainty over the shape of the US Administration under Trump. The reduction of risk, the closing of open positions and notably USD longs, is a standard reaction to such uncertainty. In the near term, the balance between position adjustment and the drivers (many of which remain) of those shorts is likely to mean that GBP/USD is likely to struggle in the 1.26-1.28 area and then drift back into the lower 1.20’s as markets refocus upon the specifically British issues.

CNY: Both our CNY TWI model and the CFETS basket has weakened in the last week. That suggests that China has been weakening the CNY both versus a strengthening US$ and against a basket of major trading partners. We noted in an earlier piece that Chinese policymakers might be tempted to engineer a quick CNY devaluation in the event of a Trump victory too - before he enters the White House - officials in China potentially calculating that their scope for meaningful CNY weakness would be politically constrained under a Trump presidency. The yuan fixes over the next couple of days represent an important source of risk that needs to be monitored.”