Prospect of Trump Stimulus Sends Aussie Dollar Plummeting

18.11.2016 • Investing

By Kris Sayce – Port Phillips Insider (Australia) –

It soared, and then it ‘unsoared’.

We refer to the Australian dollar.

After Donald J Trump’s [drink] election win, the Aussie dollar soared to its highest level since April this year. It went above 77 US cents.

But since that initial kneejerk reaction, the Aussie has reversed course.

No longer are the markets worried about policies aimed at building a big wall, turfing out illegal immigrants, or locking up Hillary Clinton; now the markets are only concerned with one thing: stimulus.

Hold up there. Stimulus?

Isn’t economic stimulus part of the so-called ‘currency wars’?

Doesn’t stimulus involve devaluing a currency by printing more money, and, therefore, devaluing said currency?

Oh please, do keep up. That’s monetary stimulus. That’s so Bernanke.

The new stimulus is fiscal stimulus. Another way of describing it is the ‘Trump Effect’. [Drink]

Instead of the US Federal Reserve printing money, the US government will issue more bonds (debt), and then spend the proceeds on big infrastructure projects.

By doing so, it takes the pressure off the Fed to stimulate with low interest rates. That’s why bond yields have taken off in recent days. It’s also why the US dollar has rebounded, and the Aussie dollar has slumped.

As US interest rates rise, it shrinks the difference between US bond yields and Aussie bond yields. The small spread between the two yields therefore makes the US dollar and US bonds more attractive relative to Aussie bonds.

That pushes down the value of the Aussie dollar.

Of course, what the markets don’t seem to be worried about just yet is: Who will buy all the bonds, how much will it cost the US government in interest payments, and what will this do to the US government’s debt pile?

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