How we know markets are picking a Trump win
Welcome back to Inside Economics. Every week, I answer reader questions about the economic forces shaping our world, as well as taking a deeper dive into some of the left-field economic news you may have missed.
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The Trump trade
I’ve already hedged my bets and written a column that gives the edge to Donald Trump in the US Presidential race. And yes, I am hoping I’ll be wrong. In that sense, it’s a bit like putting a bet on the All Blacks to lose the World Cup final. But my gut feeling is that Trump’s support has held up extremely well and he seems to be on a bit of a roll in key states such as Pennsylvania and and Arizona. We’ll see.
Financial market traders seem to have taken the same stance. We know they favour Trump because we have seen the US dollar strengthening and bond yields rising in recent weeks.
Business Herald senior markets writer Jamie Gray took a deep dive into the so-called “Trump Trade” at the weekend (which you can read here).
He notes that “markets anticipate fiscal expansion and more bonds coming on stream under a Trump administration, which has served to drive yields up across the curve.”
In other words, Trump’s proposed tax cuts would require more US borrowing to deal with the inevitable deficit blowout. More borrowing means more US bonds being issued and puts upward pressure on interest rates... which pushes a stronger US dollar.
The Trump trade means we can see markets have been pricing him in as odds on to win. But on Tuesday the US dollar actually slipped back a bit, something analysts pinned on a poll which showed Kamala Harris taking the lead in Iowa a state Trump is expected to win.
So those masochists following every poll and every bit of commentary about this US electoral circus can add the currency markets to their list of barometers to check.
A stronger US dollar means traders are more confident of a Trump win, a weaker US means they are less confident. And thanks to the joy of live trading you can watch those odds change by the minute.
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We should be wary of other factors that might move the markets. But at this point, the US election is casting a long and dark shadow.
There’s also no way to know if the market will pick it correctly. It’s just another (admittedly larger) bunch of people watching worrying and making a call.
The nice thing — especially for those who worry about media bias — is that financial markets don’t care about anything except making money.
So while they can get it wrong it won’t be because of blind support for one candidate or the other.
In the scheme of things, the Kiwi dollar is pretty irrelevant. But the Herald’s Jamie Gray quotes ASB economist Mark Smith pointing out that a Trump win won’t be great news for us.
“If Trump goes through with the protectionist sentiment, it will mean a big headwind for the New Zealand economy, which depends on trade.
“That can hurt the New Zealand economy, so I would expect the New Zealand dollar to weaken further.
“A Trump victory would certainly be a negative for the New Zealand dollar.”
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