Nothing But Good News

The Australian dollar fell, and while it will not last, it is a great help. The so-called Trump Rally has been evident in both the US and Australian stock markets, as well as in currency markets.

We were expecting stocks to go much higher with a Trump victory, as it was always on the cards that his pro-business policies would stay on the agenda, while the more extreme social views would not. This is exactly what is happening. From a business and markets perspective, this is a perfect positive storm for the US economy. Support through greater infrastructure investment and the opportunity enhancements that come with lower taxes.

The USA was already at full employment and growing at 2.9% with interest rates at ridiculously low levels. Now this incredible situation will only get better.

The reason people have been buying the US dollar is that they believe that due to Trump’s planned spending big on infrastructure, the Federal Reserve will have to raise rates even faster than might have otherwise been the case. To be honest, I find this all a little amusing. You see, we always expected the Federal Reserve to be hiking rates. We consider the Fed to be behind the curve, that is, it should have already hiked rates three or four times by now. Rather than just the once.

That one rate hike was a long time ago now and was a mere raising of rates from 0.25% to 0.5%. So this next Federal Reserve rate hike in December will be simply to raise official rates there, to the dizzying heights of three-quarters of one percent. Hardly a reason to get excited about the currency, the US dollar?

Yet this is precisely what people are doing. The foreign exchange market is the biggest market in the world. As big as all the stock markets of the world combined. These days it is filled with crowds of people who are relatively new to the game and just want to keep things simple. In doing so, they gain a sense of feeling clever really. This is why the idea that a big spending President would lead to “higher” rates, has gathered so much momentum. It feels like a straight forward 1+1 scenario.

The real world is of course far more complex. Yes, the Federal Reserve will be raising rates, but it would have been doing that anyway. Will they raise rates more? Well, we will never really know because we will not be able to compare. The media likes a fear campaign as we know. The situation of Trump spending is being spun that the Federal Reserve has to panic to raise rates to counter his economic flamboyance.

Here’s the thing though… In this modern world of true price competitiveness, inflation is already a non-starter. Just a tepid cup of tea really and will not be a serious problem, if at all, for many years to come. This means the Federal Reserve is still only likely to raise rates to 1.25% in 2017 as we have always forecast, and perhaps 2.25% by mid-2018.

My question is, is this really enough to offset what would normally be a negative for the value of any currency, that is, big government spending? Then there is the still significant trade deficit.

For now, we will respect the direction the currency markets are taking, but I am looking to sell the US dollar, buy the Australian dollar, at the first sign of weakness from here.

For the Australian property market, there are significant ramifications.

The external upward pressure on property prices here is likely to be only exasperated by this recent weakening of our currency. More significantly perhaps, foreign buyers may well see this as a “window of opportunity” that will not last. They may well bring forward any property purchases and investment, which they had previously intended for a later date.

Again, global events are creating a real pressure in our own backyards, which will force property prices ever higher again.

As we keep saying, the risk is not of a correction, but upward acceleration!

Clifford Bennett