USD continues to strengthen in anticipation of Trump win

USD: US yields regain upward momentum encouraging a stronger US dollar

The US dollar climbed to fresh highs yesterday after the dollar index finally broke above resistance from the 200-day moving average at around 103.80. The move higher for the US dollar at the start of this week was supported by a further adjustment higher for US yields. After consolidating at higher levels in recent weeks, the 10-year US Treasury yield has regained upward momentum and closed above its 200-day moving average at just below 4.2% for the first time since in early July. The price action indicates that market participants are moving to price in a higher probability of Donald Trump winning the US election. His campaign proposals to raise tariffs, maintain loose fiscal policy and tighten immigration are all viewed as inflationary for the US economy which would curtail the Fed’s room to keep lowering rates in the coming years if implemented. As a result we would expect the US dollar and yields to continue moving higher heading into year-end if Donald Trump wins the US election. A Trump victory is still far from fully priced in leaving plenty of room for further upside.

Yields at the short end of the US curve have been moving higher as well as market participants become less confident that the Fed will cut rates in November and December. The ongoing hawkish repricing of Fed rate cut expectations was supported as well yesterday by comments from Fed officials. Kansas City Fed President Schmid stated he hopes for “a more normalized” policy cycle where the Fed makes “modest” adjustments to sustain economic growth, stable prices and full employment. He favours taking a “cautious and gradual approach to policy”. His preference is to avoid outsized moves especially given the uncertainty over the eventual destination of policy and his desire to avoid contributing to financial market volatility. Overall, his comments were consistent with the Fed’s plans to slowdown the pace of easing by delivering 25bps rate cuts at upcoming policy meetings. Those comments were shared by Minneapolis Fed President Kashkari who stated he is “forecasting some more modest cuts over the next several quarters” to get to something around neutral”.  In contrast, San Francisco Fed President Day displayed more concern over the health of the labour market. She stated that “this is a very tight interest rate for the economy that already is on a path to 2% inflation, and I don’t want to see the labour market weaken further”. The renewed upward pressure for US yields at the start of this week has resulted in the US dollar strengthening the most against the yen amongst G10 currencies. It has lifted USD/JPY closer to the 200-day moving average that comes in at around 151.40. 

TRUMP TRADES: HIGHER US YIELDS, STEEPER CURVE & STRONGER USD

Source: Bloomberg, Macrobond & MUFG GMR

EM FX: US election increasing risk of sharper sell-off for EM FX

Emerging market currencies have continued to weaken over the past week extending their sell-off this month. The worst performing emerging market currencies over the past week have been the Latam currencies. The MXN has declined by -2.8% vs. USD, the CLP by -2.4%, and the BRL by -1.8%. In contrast, the TWD has outperformed strengthening by +0.4% vs. USD. Weakness in emerging market currencies against the USD appears to have been driven mainly by the pricing in of a higher risk premium ahead of the US election to reflect the rising probability of a Trump victory. According to Polymarket the probability of a Trump victory has risen back above 60%. The national opinion polls have revealed a narrowing lead for Kamala Harris that is more consistent with winning the popular vote but not the electoral college. Donald Trump has established narrow leads in many key battleground states. We expect US political risks to remain the key driver of EM FX performance in the coming week ahead of 5th November election

US political risks have helped to lift USD/BRL and USD/MXN back closer to year to date highs at around the 20.000 and 5.7000-levels respectively. The MXN was the worst performing emerging market currency initially following Trump’s first election victory in 2016 when it fell by -10.3% vs. USD between 7^th November and 30^th December 2016 while the BRL weakened more modestly by -1.4%. The BRL did not weaken more significantly until 2018 and 2019 when trade tariffs were implemented an the global economy slowed down. MXN weakness was more front-loaded with the high point for USD/MXN during Trump’s first term put in place in January 2017. History could repeat again with Trump threatening to impose 10% import tariffs on all countries, and a 100% tariff on cars imported from Mexico although the scale of the initial MXN sell-off  could be partially curtailed by the fact it has already fallen by around 16% since the run up to the  Mexican election in June. Banxico would likely step back into the FX market to support the MXN as well. Cars, auto parts and other vehicles accounted for about 28% of total exports to the US in 2023.       

The stronger USD is contributing to weakness in EMEA FX especially the Central European currencies. It prompted the NBH to deliver a more a hawkish policy signal ahead of this week’s policy meeting. Deputy Governor Virag stated that they are ready to pause interest rates for a an “extended period” to provide more support for the forint and dampen upside risks to the inflation outlook. EUR/HUF is still threatening to move further above the 400.00-level despite hawkish comments. Please see our latest EM EMEA Weekly for more details (click here).   

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
US	11:00	IMF Meetings	--	--	--	!
GE	11:00	German Buba Monthly Report	--	--	--	!
GE	14:15	German Buba President Nagel Speaks	--	--	--	!!
UK	14:25	BoE Gov Bailey Speaks	--	--	--	!!!
US	15:00	FOMC Member Harker Speaks	--	--	--	!!
US	15:00	Richmond Manufacturing Index	Oct	-19	-21	!
EC	15:00	ECB President Lagarde Speaks	--	--	--	!!
EC	16:00	ECB's Lane Speaks	--	--	--	!!
US	18:00	M2 Money Supply (MoM)	Sep	--	21.18T	!
UK	20:15	BoE Breeden Speaks	--	--	--	!

Source: Bloomberg