Trump has now closed the gap so far that his odds of winning are better than Bill Shorten’s ever were leading into the Australian Federal Election
So, we cannot dismiss the possibility of Trump being the next US President no matter how surreal it might seem.
What would a Trump win do for interest rates and the AUD:USD rate?
This has rapidly escalated to become the number one question we get about world markets. So below is an outline of my views, but in short a Trump win may push out longer term rates as the policy influence he can actually have would be slightly inflationary. But the reality of high government debt around the world, including the US, and an outlook of lower economic growth means that any Trump effect on rates and therefore the USD will be very muted.
There are four broad Trump factors at play:
- Trump means more volatility
People fear the unknown, and Trump means more uncertainty than Clinton does. So all other things being equal, the first reaction by the markets would be to push the USD down, but this will be short lived for the reasons below.
- Trump’s ability to execute his radical policies
The reality is that the President cannot make radical changes to the way the government raises and spends its money. The ability for the President to unilaterally impound funds to use as they see fit was severely restricted following Nixon’s term. The President has more freedom with regard to military actions as Commander in Chief, but this was curtailed following the Vietnam War.
Congress and the President need to be aligned for significant policy changes to be enacted. The President proposes a budget, for example, but Congress must approve it. The President can veto a bill, but not change it. Congress can overturn a President’s veto, but only with a 67% majority.
So the ability for Trump to implement his policies comes down to the make up of Congress. A Democrat majority Congress will block the majority of his proposals. A Republican majority Congress will approve more of Trump’s policies, but it is far from guaranteed they will make it easy for him. A significant number of Republicans don’t like Trump and would want to see him fail fast, so anything too radical would likely fail to pass Congress.
A list of his policy proposals and his ability to unilaterally implement them appears below, but on balance his changes would be very mildly positive for the USD in the next few years.
- Trade, China and the impact on Australia
Trump’s anti trade pact stance could mean less trade but the likely impact will be much less than people fear. As explained below, while he can significantly disrupt China US trade relations and therefore uncertainty, the more likely case is that this disruption will be muted when Trump is forced to moderate his stance when negotiating with Congress. For Australia, the worst case scenario is that Congress allows Trump to target steel in particular, which would be detrimental to the Australian economy. On the other hand, more tension between China and the US would be positive for our education and tourism sectors, and maybe positive for inbound property investment.
- Changes at the US Federal Reserve
Changes at the Fed that result in a change in interest rate direction will impact the USD; a perception that a new Fed team will increase rates faster will cause the USD to jump.
Trump has been very critical of Fed Chairperson Janet Yellen, accusing her in particular of holding back interest rate increases to make the Obama Administration look good. While Trump can’t hire and fire, there does tend to be a changing of the guard with new governments as Fed members choose not to work with an administration with different views to them.
More about what President Trump can and can’t do
Much of the economic policy issues such as tax or trade matters require Congress to support him, and he is far from guaranteed to get an all Republican congress supporting him on everything, particularly the antitrade legislation. Below we have taken each of Trump’s major policy positions and looked at what he can do unilaterally versus where he needs support from Congress.
Lower taxes – Can’t do this without Congress
The President is supposed to spend funds appropriated by Congress on the things that Congress appropriates them for.
Tariffs on Chinese imports – Can do this
He can claim that they are dumping. George Bush did this in 2002, but the WTO ruled it unlawful. Trump could still push ahead by withdrawing from the WTO (which he has authority to do). At the very least he will create uncertainty which will hurt China – the only question is how much they (and therefore we) get hurt. As this is all within his existing powers, only a super majority (67%) of Congress can stop him.
Mass deportation of illegal immigrants – May do it, but not practical without Congress support
This is the grey zone where he can order the immigration department to increase their activity, but to do this they will need more funds, and that has to go through Congress.
Military action – Technically can’t, but practically can do this
This is another grey area where presidents can act outside their own laws if the courts choose to stay out of it. A President should get Congressional authority (funds required) but several Presidents have chosen not to and the courts haven’t acted. George Bush senior even stepped in once to pardon Iran Contra accused.
Block Muslim immigration – Can do this
He just needs to deem Muslims detrimental to the interests of the US. Reagan did this with the Haitians in the 1980s. The courts could rule this unconstitutional, but that would be a brave judge (when a Federal judge ruled against Trump in the recent past, he called the judge a “Mexican”, despite the fact that the judge was American born).
The Wall – Can’t do this without Congress
Same as above – he can only spend money on the items the money was appropriated for
Crackdown on journalists – Can do this
Just needs to more aggressively apply federal secrecy laws. Similarly with targeting other critics – the US President has some latitude applying existing laws to direct US agencies to target his critics for antitrust violations or tax avoidance.
Unwind Obama’s environmental agreements – Can do this
Just needs to “unsign” the Paris climate change agreement, much like Bush did with the international criminal court agreement previously signed by the US. If US courts rule this option out, Trump can just refuse to enforce the environmental legislation, just as Obama did with immigration legislation.
Death penalty for killers of police officers – Can’t do this
This requires legislative support, and changes in state legislations.
Conclusion
So, overall the USD might trade down initially on the shock, but the reality of at least some of Trump’s policies being positive to the level of the USD will take hold quickly thereafter. Add to this the downside risks to the China US trade relationship, and the impact on the AUD:USD is quite likely to be negative. The severity of the fall for the AUD will depend upon the Republicans’ majority in Congress and how well Trump can negotiate with Congress over time.
As for the next few weeks in the lead up to the election, we can count on a lot more volatility. The closer Trump gets to the Whitehouse, the more downward pressure that the dollar will come under due to the fear of the unknown. A lot of institutional investors were caught unprepared for the shock of Brexit; they won’t make the same mistake twice, instead reducing their exposure to the USD and US equities the closer Trump gets.