• US election. Trump’s decisive win has seen markets reprice the outlook. US equities outperformed, bond yields rose, & the USD strengthened.
• Fed outlook. US Fed & BoE expected to deliver cuts tonight. But Trump’s agenda points to fewer Fed rate reductions over 2025.
• AUD vol. AUD whipped around by US election results. Prospect for higher US rates suggests the AUD may linger in the mid-$0.60s for some time.
The US election has been a major market moving force over the past 24hrs, and the result is likely to be a significant factor that influences how things pan out over coming months. The decisive victory for former President Trump, which was the underlying signal from various opinion polls and probability gauges over recent weeks, has quickly started to be factored in. The win by Trump will make him only the second US President to serve non-consecutive terms in history. Widespread gains by the Republicans has also seen them capture the Senate, and they are also ahead in the race for the House meaning the chances of a ‘red sweep’ are real. If realised, this should make enacting Trump’s 2.0 policy platform easier.
In response, US equities jumped up with the S&P500 (+2.5%, its best one-day performance in nearly two-years) hitting a record high. Under the hood sectors like financials (+6.2%), industrials (+3.9%) and consumer (+3.6%) stocks outperformed, as did small-caps, on the potential for market friendly cuts to corporate tax, deregulation, and stronger economic activity down the track. However, it was notable that the Trump ‘America First’ dynamics didn’t translate to other regions. European equities declined (EuroStoxx50 -1.4%) with the prospect for Trump to impose broad-based protectionist trade-tariffs on US imports clearly on investors’ minds.
As outlined previously, we believe the mix of trade-tariffs, greater fiscal spending, and moves to curb US immigration may generate an (unwanted) inflation impulse, which in turn means the US Federal Reserve lowers interest rates by less than would otherwise be the case (see Market Musings: US election – FX inflection point). This is the way markets are also viewing it with 10yr US breakeven inflation (now ~2.4%, a high since early-May) and interest rate expectations rising. The benchmark US 10yr rate rose ~15bps (now 4.43%, the top of its 4-month range) and the 2yr rate also increased (now 4.27%). The US Fed is widely expected to deliver another 25bp rate cut tomorrow (6am AEDT) (with the Bank of England also set to cut tonight (11pm AEDT)), but a relatively shallower Fed easing cycle now looks in train. Markets are now assuming the Fed funds rate bottoms at ~3.72% in mid-2026, up from ~3.56% ahead of the US election. The upward adjustment has underpinned the USD, especially against EUR (-1.8% to ~$1.0737), the interest rate sensitive USD/JPY (+2% to ~154.50), and USD/CNH (+1.3% to ~7.1980). NZD (now ~$0.5950) and AUD (now ~$0.6585) have also lost ground, however they are both above their respective lows with the AUD’s sturdier fundamentals and upswing in US equities helping it outperform.
Further bursts of market volatility should be anticipated over the period ahead as the final results for the US House elections come out and the US Fed meets. But on balance, as discussed in our prior research, we believe the Trump/Republican win and policy platform points to the USD remaining supported over the medium-term.
AUD Corner
The AUD has been whipped around by swings in various markets generated by former President Trump’s win (see above). After the initial burst of broad-based USD strength as election results flowed in, the AUD clawed back ground as relative strength on a few crosses kicked in. At ~$0.6585 the AUD is tracking towards the middle of yesterday’s wide trading range and broadly inline with where it was at the end of last week. By contrast, the AUD has risen by ~1% versus the EUR (now ~0.6133), ~1.2% against the JPY (now ~101.73), ~0.3% relative to GBP (now ~0.5107) ahead of tonight’s expected BoE rate cut (11pm AEDT), and ~0.6% compared to CNH (now ~4.7395).
As outlined above and in our previous research, we think former President Trump’s agenda, which is centered on large trade-tariffs, greater fiscal spending via reductions to corporate tax and rolling over existing income tax cuts, and moves to curb US immigration are a cocktail for stickier US inflation. While we still expect the US Fed to deliver another interest rate cut tomorrow (6am AEDT), the evolving backdrop could see it deliver fewer rate reductions than was baked in over coming quarters. On net, we believe the prospect for US interest rates staying higher than would otherwise be the case, combined with macro and geopolitical uncertainty, and a Trump unpredictability factor should see the USD also remain stronger for longer. In our opinion, this points to the AUD lingering in the mid-$0.60s over coming months rather than kicking back up towards ~$0.70 as had been widely anticipated (see Market Musings: US election – FX inflection point).
That said, while we expect to see further bouts of market (and AUD) volatility near-term, we don’t foresee the AUD sustainably falling much further from current levels. We feel the AUD is already discounting a lot of ‘negative news’ given it is trading below our estimates of ‘fair value’. Various fundamentals are also still in the AUD’s favour. Domestically, the resilience in the labour market and gradual improvement in core inflation due to elevated aggregate demand on the back of strong population growth supports our long-held view that the RBA will at the back of the pack when it comes to rate cuts. We continue to believe that the start of a gradual and modest RBA easing cycle is a story for H1 2025. Interest rate markets are factoring in less than ~2 rate cuts by the RBA in 2025. Over the medium-term we think the diverging policy trends between the RBA and other central banks should be AUD supportive versus EUR, CAD, GBP, and NZD. Moreover, as our chart illustrates, when it comes to Trump 2.0 policy, while China is facing the highest tariff severity other nations (i.e. Canada, Mexico, and the EU) potentially face greater economic consequences as their exports to the US are a greater share of GDP. This, more China stimulus, and upbeat risk sentiment, may also be relative AUD supports.
