Aussie dollar surges against falling US dollar

US dollar weakness

The decline in the US dollar on the back of Donald Trump's rather fiery first formal press conference this week is mostly down to three themes:

• Guidance (rather the lack of it);
• Taxation policies - what he will enact what he won't;
• Industrial growth - infrastructure spending is key to the reflation story.

The "Trumpflation" trade is premised on the idea that infrastructure spending will increase dramatically (US dollar investment positive) and business taxation rates will be conducive for business investment (again a US dollar positive), leading to jobs creation, confidence and spending.

(The secondary part of his taxation policy is that he is clearly going to use tax as a protectionist weapon - have a look at his comments about Ford, GM and Toyota.)

The issue with his speech was that the guidance around these themes was either non-existent or lacked substance.

The dollar index has rocketed since Trump was elected and some of the premium from his expected fiscal policies was unwound overnight on the back of his speech.

We expect that leading into his inauguration and with limited communication as to which policies will be enacted first (barring his comments on social media), the US dollar premium is likely to further dilute before another possible pick-up as we approach the March meeting of the US Federal Reserve and the prospect of another interest rate hike.

Aussie dollar strength

Clearly the immediate strength in the Australian dollar is actually a US dollar story, with the Aussie dollar benefiting from the dampening effects of Trump's press conference.

However, looking through the interim news around Trump, Australian dollar strength looks likely in the first half of 2017.

The key reason is growth. Recent purchasing managers' index (PMI) data (both manufacturing and services) clearly signals that growth in 2017 is on the horizon.

And it's not only the PMI data that is backing the Aussie dollar. Business confidence and conditions remain high and economic data such as the trade balance, housing and consumption all suggest a stronger Australian economy - the green shoots are there. This, coupled with the moves in bulk commodity prices over the past six months, suggest the $A's outlook is rather positive.

Further to this point, the interbank market is pricing a rate cut over the next four months at near enough to no chance, meaning currency devaluation from the Reserve Bank is very unlikely, further adding to the idea that Australian dollar strength is likely in the coming months.

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