AUD: Potential implications of the US Presidential election - NAB

Research Team at NAB, suggests that the impact of the win in the U.S. Presidential election by Mr Trump is at this stage highly uncertain and what Mr Trump’s priorities are how he will interact with the Congress , and other nations is all up in the air.

Key Quotes

“Some key issues that we will be monitoring are:

“The degree of volatility in markets. Financial markets experienced large moves as it became more apparent that MrTrump would win but then reversed course. Persistent bouts of volatility would have implications for Federal Reservemonetary policy as they typically push back any planned rate hikes in that environment. Uncertainty can also affectbusiness investment decisions and consumer confidence. At this stage we are leaving our call for a Fed rate hike inDecember unchanged.”

“The likelihood of greater fiscal stimulus (and public debt) as Mr Trump’s plans included significant tax cuts and publicspending proposals, with limited budgetary savings. How the Republican congress – which has in the past tried to curbthe budget deficit – will react is unclear, although the proposed tax cuts would have strong appeal.”

“What measures are implemented to curb what the President-elect sees as “unfair” trade, particularly in relation to China and NAFTA. These could include declaring China to be a “currency manipulator” “on day one” and a 45% tariff on US imports of Chinese goods. The risk is that this could trigger a trade war.”

“How aggressive are the steps taken to reduce ‘illegal’ immigration (building a wall on the border with Mexico), and to deport existing unauthorised immigrants residing in the US. This has the potential to lower US growth potential and be inflationary if it were to lead to wage pressures.”

“Fiscal stimulus in an economy close to full employment is likely to be inflationary and suggests a risk that the US Federal Reserve may eventually have to increase rates more aggressively. This, coupled with higher public debt, could see long-term bond yields move higher.”

“For Australia specifically, perhaps the biggest threat to the Australian economy in the wake of the election is the implication for trade policy. In particular, Mr Trump’s criticisms of China and his warning that a 45% tariff could be imposed on imports of Chinese goods raises the risk of a US-China trade war if the latter retaliated. China is easily Australia’s biggest export market but the US is the biggest foreign investor here and the third biggest export market. Australia would face an unenviable position if trade tensions arose between such important economic partners as China and the US. Additionally, the future of broader trade pacts, including the TPP, are now under threat.”