Dollar ekes out more gains as markets eye Trump victory.
The ‘Trump trade’ continues to drive markets worldwide, and currencies are no exception.
Highlights:
- Dollar remains on top as Trump leads in WH race.
- EUR/USD falls on dovish ECB remarks.
- UK Autumn Budget set to unveil large tax hikes.
- JPY hits new lows after LDP loses majority in election.
- BoC delivers 50bp rate cut, but likely a one-off move.
- Australia Q3 inflation report eyed by markets this week.
- CNY volatility rises to 2022 high ahead of US election.
While the US presidential race remains close, the latest polls have clearly broken Trump’s way. The result has been higher US Treasury yields on fears of a tsunami of debt issuance there, and a higher dollar. The dollar rally aspect of the Trump trade has itself three legs: fears of aggressive US tariffs, the move in rates described above, and a generic flight to safety due to the uncertainties of a potential second Trump presidency. It’s worth noting that commodity prices are holding on quite well in spite of the flight to the US dollar, and this may open up buying opportunities in some of the more battered emerging market currencies, particularly in Latin America.
This week is unusually heavy in terms of macroeconomic releases. In the Eurozone, third-quarter GDP (Wednesday) and the key October flash inflation report (Thursday) will drive pricing for upcoming ECB rate decisions. In the US, we’ll get third-quarter GDP figures (Wednesday) and the all-important US payrolls report for October (Friday). We expect this deluge of data to take a back seat, however, to the batch of polls to be released in the final stretch of US election campaigning.
USD
Economic reports out of the US continue to surprise to the upside, although this dynamic is mostly overshadowed by the headlines and polls about the presidential election, which will take place next Tuesday (05/11). Trump now holds a relatively healthy advantage according to the latest odds and predictions models, and is ahead in the opinion surveys in five of seven swing stages. We advise against taking late release polls too seriously, however, and we far from see the election as set in stone, particularly given how inaccurate the polls have been in the recent past.
Friday’s nonfarm payrolls report continues one of the two most important data points worldwide, the other being US inflation. The Federal Reserve will be paying very close attention to the wage growth number, given the rebound inflation data we have seen recently. The Fed’s preferred measure of inflation, the PCE index, will also be released on Thursday.
EUR
Last week saw no break in the streak of dismal economic data out of the Eurozone. The best that can be said for the PMIs of business activity for October is that they got no worse from September, although they didn’t improve either. At best, recent macroeconomic news has been consistent with a stalling Eurozone economy and, at worst, a an outright quarterly contraction in GDP. High employment, and the absence of signs of significant jobs destruction, may be just enough to keep the Eurozone out of a technical recession, however.
This week’s GDP numbers are important, although they are lagging indicators that provide no clear read as to the current state of demand. More timely will be the October flash inflation report, which will be a key input to the next ECB rate cut decision. Communications from ECB president Lagarde have been dovish in recent days, and markets are now fully pricing in four 25bp cuts in each of the next four Governing Council meetings.
GBP
The pound remains the best performing G10 currency, and second only to the South African rand, among the majors so far in 2024. The PMIs of business activity, out last week, confirmed that Britain’s economy continues to grow, in contrast to European stagnation, albeit at a slightly weaker pace than expected. Yet, with UK inflation now back below the Bank of England’s 2% target, market participants are increasingly pricing in a more aggressive MPC easing cycle.
This week’s budget statement from the Labour government is shaping up to be an unusually sizable political event risk for sterling. Sweeping tax hikes are expected, with capital gains tax, employer NI contributions, inheritance tax and pensions all likely to be targeted. Chancellor Reeves will also provide details on Labour’s fiscal rule change, which is expected to unlock billions of pounds in extra borrowing. Should she successfully convince investors that Labour have a credible plan to boost growth, without triggering a blow up in the gilt market, then the pound could emerge unscathed, but this remains a big if.