As the US election closed on November 8th last year, the Trump Trade was born. Interest rates, domestic data and central bank murmurings were no longer the main catalyst behind currency movements. While still present, political rhetoric and nationalistically focused economic policies were causing the markets to move.
After years of recovering from stagnant and lacklustre growth, Wall Street had new signs of life breathed into it. Trump’s promise of dominant infrastructure spending, tax cuts, a pro-business agenda and control over both the executive and legislative branches of the US government saw the dollar rally to its highest level in fourteen years, with equities and stocks also soaring.
Trump vs Congress
Fast forward 6 months and this new market hope is diminishing and we are now looking at a ‘Trump Fade’. Trump’s first big failure was noted when he failed to immediately repeal Obamacare and replace it with his own version, ‘Trumpcare’. While he did eventually manage to repeal the formers healthcare plan, his failure to do so on the first go worried investors as it signalled that the other pro-business reforms were likely going to face similar obstacles.
The dollar retreated, stocks waned slightly and the US dollar index recoiled from its fourteen years highs. Further, the supposed budget savings from repealing Obamacare, estimated at $1trn over the course of the next 10 years disappeared like a political promise.
Trump then focused on his first budget and tax plans.
The plan proposed the biggest tax cuts in at least thirty years and was designed around boosting the affordability and effectiveness of US businesses against foreign companies. It is important to note that the plan was not costed, which means it could cause the national debt of the US to increase by trillions. Trump’s first major budget was next on the agenda and upon its release was immediately labelled as ambitious and ludicrously optimistic in the economic assumptions it embodied.
The budget promised to balance the federal budget over the next ten years and proposed $3.6T in spending cuts, which if enacted would hit programs like Medicaid and food stamps (all programs his followers vehemently support). Both his tax plan and budget caused a slight jump in the US dollar but they are still awaiting congressional approval.
The Australian declined on this tax plan, as investors clung onto the mast of these promises, buying USD, whilst stocks and bonds gained in strength.
Strife on Capitol Hill
Adding volatility to the unpredictably of the aforementioned promises and proposals is the political quagmire Trump has found himself sinking into of late. It is benefiting the Australian dollar though, as US dollar buyers are becoming increasingly concerned over the effect the political strife will have on the market.
The main area of course in regards to this has been the sacking of then FBI Director James Comey who was sacked during his investigating of alleged ties between Russia and the Trump presidential campaign. Further adding to the strife, news outlets began reporting a memo written by former FBI Director Comey, which alleged that Trump pressured him to dropping an investigation into sacked national security adviser Michael Flynn’s dealings with Russia.
As political turmoil further engulfed President Trump, the US share market suffered its biggest decline since the November election and the US dollar declined against the majority of its peers. The Dow Jones industrial average was down roughly 1.3% and the S&P 500 down 1.2%. The latest controversy stems from news reports referencing a memo written by former FBI Director Comey which alleges that Trump pressured him to drop an investigation into sacked national security adviser Michael Flynn’s dealings with Russia.
As a result, the Dow and S&P 500 had their worst day in 8 months, as investors further concluded that tax and healthcare reforms are unlikely to proceed. The US dollar index was also negatively affected by this news and fell to its lowest level since the election. The Australian dollar also did not benefit as the markets sought safety from risk assets, with gold and the Japanese Yen benefiting.
The euro renaissance
Further highlighting the uncertainty in the US and how it was affecting the markets has been the Euro Renaissance. It has been quite the surprise for the markets, but thanks to robust economic data, solid strength in the Eurozone share market and the election of Macron; the euro has climbed to its highest levels since the infamous month of November 2016.
The euro is currently the best performing currency of the G10, having appreciated 7% against the dollar. What is most important to note is the polar opposite effect that the French election had on the EUR compared to the USD. Thanks to Macron’s victory in May, the markets have averted their eyes from Eurozone political risk and rather have looked at Eurozone inflation, which is currently at just under 2%. Further, the Eurozone economy has grown at a healthy 0.5% in the first quarter.
Markets will be focusing on Macron and Merkel and how well they can unite the Eurozone’s varying economic drivers to continue the recent good run. Moreover, the focus will be on collaboration between the Eurozone’s capital markets and the handling of financial issues in countries like Greece. Domestically, the Australian dollar has remained underpinned by these factors against the bloc currency.
The euro is now an attractive currency to buy as it holds less risk than the US dollar due to the prospect of a consolidated Eurozone and strong data. It is an example of a currency that is being driven by the traditional positives of market movers and optimistic politics, with investors’ very likely thinking – “what’s not to like?” On the other hand, across the North Atlantic the markets have enjoyed the Trump Trade, and are now looking at the Trump Fade – is the ‘Impeach Trade’ next?
Alex Cook
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