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A Trump victory could boost stocks yet result in a depreciation of the Australian dollar (AUD).
Typically, rising stock markets and the Australian Dollar go hand in hand, but this long-established link might not hold if Donald Trump wins a second term, says Tommy von Brömsen, FX Strategist at Handelsbanken.
"The typical "high beta" currencies (NOK, AUD, NZD, SEK) have a high exposure to the Trump trade," says Tommy von Brömsen, FX Strategist at Handelsbanken, on the day America heads to the polls in an election that is simply too tight to call.
A Weaker AUD is One Expression of the 'Trump Trade'
He explains Trump's proposal for higher import tariffs could impact global trade flows and potentially harm economies that rely heavily on exports, like Australia.
Increased government spending and tax cuts could lead to higher U.S. interest rates, making US assets more attractive to investors and driving capital away from other currencies like the AUD.
von Brömsen says the unpredictability of U.S. actions on the global stage could also trigger risk aversion among investors, leading them to seek safer assets and causing currencies like the AUD to depreciate.
Von Brömsen's analysis emphasises that the "Trump trade" won't affect all currencies equally. Currencies like the AUD, NOK, NZD, and SEK, categorised as "high beta" currencies, are particularly susceptible to the "Trump trade" and are likely to depreciate against the US dollar.
He draws a parallel between the sensitivity of "high beta" currencies to the "Trump trade" and their responsiveness to "risk sentiment." This suggests that these currencies tend to weaken when investors become more risk-averse, as might happen under a Trump presidency with its associated uncertainties.
Von Brömsen provides evidence for this trend by pointing to currency movements in October 2024 when the probability of a "red sweep" (a Republican win of the presidency and both houses of Congress) increased. During this period:
- The US 2-year yield rose considerably.
- The US dollar index appreciated.
- The AUD, NZD, and SEK depreciated against the US dollar.
Why Stronger Stock Markets Won't Help AUD
Von Brömsen's statistical models confirm that the AUD has a high exposure to the "Trump trade," making it vulnerable to depreciation if Trump wins.
While acknowledging that a Trump win could potentially boost stock markets, which might offer indirect support to the AUD due to its "beta" exposure, von Brömsen contends that the direct impact of the "Trump trade" will likely prevail, leading to AUD depreciation.
This conclusion is supported by two key factors:
His model already considers "beta" exposure, meaning the estimated impact of the "Trump trade" goes beyond the effects of stock market fluctuations.
The potential stock market gains might stem from specific expectations like lower corporate taxes, rather than a broad improvement in risk sentiment, making the link to AUD appreciation weaker.