Dollar Higher as the Trump Trade Rolls On

November 14, 2024

Win Thin

Republicans have won a majority of seats in the House of Representatives; Fed officials are clearly debating how far rates should fall; October CPI met consensus; PPI will be reported today; Mexico is expected to cut rates 25 bp to 10.25%
ECB releases the account of its October meeting; BOE is in no rush to cut rates; despite the relatively hawkish BOE, sterling has come under greater pressure
Australia October jobs report was solid

The dollar is powering ahead as the Trump Trade rolls on. Republicans have won the House, giving President-elect Trump the wherewithal to carry out his economic agenda (see below). DXY is trading at a new cycle high near 107 and is on track to test the October 2023 high near 107.348. The euro traded below $1.05 earlier but has since recovered to trade near $1.0515. Clean break below the November 2023 low near $1.0515 sets up a test of the October 2023 low near $1.0450. USD/JPY traded at a new cycle high near 156.25 before falling back to around 156. Trading in this pair is likely to remain choppy as markets perceive higher intervention risks above 155. Lastly, sterling is trading lower near $1.2650 and is on track to test the June low near $1.2615. While we’ve already come a long way, we look for this dollar rally to continue. While the election results have turbo-charged this move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Despite the 25 bp cut last week, we believe the Fed will continue to take a cautious tone going forward, especially in light of what we view as heightened inflation risks in a second Trump term. Market pricing for the Fed has already adjusted, which is giving the dollar a huge lift.

AMERICAS

Republicans have won a majority of seats in the House of Representatives. With his party securing control of both chambers of Congress, President-elect Trump will face limited political resistance to implementing his fiscal and regulatory wish list. As a result, investors should continue to lean into dollar strength. First, the U.S. economy is in a sweet spot and outperforming other advanced economies. Second, the prospect for looser fiscal policy under a Trump administration will force the Fed to keep policy restrictive for longer. Third, expectations for a lower U.S. corporate tax rate and a wave of deregulation should boost foreign portfolio and FDI flows into the U.S. Lastly, the favorable U.S. productivity landscape should lead to low inflationary economic growth, which translates to higher real interest rates.

Fed officials are clearly debating how far rates should fall. Logan said “I anticipate the FOMC will most likely need more rate cuts to finish the journey. But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.” Elsewhere, Schmid said “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.” The market is pricing in a terminal rate slightly north of 3.75%, which is about a full percentage point above the Fed’s expected long-term rate that stood at 2.875% in the September Dot Plots. This debate will be ongoing well into 2025. Kugler, Barkin, Powell, and Williams speak today.

October CPI data met consensus. Headline picked up two ticks as expected to 2.6% y/y while core remained steady as expected at 3.3% y/y. Super core CPI (core services less housing) remained uncomfortably high in October, rising 0.3% m/m vs. 0.4% in September and 4.4% y/y vs. 4.3% in September. Looking ahead to November, the Cleveland Fed’s Nowcast model sees headline and core at 2.7% and 3.3%, respectively. While inflation has eased significantly over the past two years, the Fed has clearly become more cautious about the inflation outlook, which is why its FOMC statement last week scrapped the previous reference that it had gained greater confidence that inflation is moving sustainably toward 2%.

PPI will be reported today. Headline is expected to pick up half a point to 2.3% y/y while core is expected to pick up two ticks to 3.0% y/y. Watch out for PPI services ex-trade, transportation, and warehousing, as it feeds into the core PCE calculations. Another sticky print above 4% y/y poses an upside risk to PCE inflation.

Banco de Mexico is expected to cut rates 25 bp to 10.25%. At the last meeting September 26, Banco de Mexico cut rates 25 bp as expected to 10.50%. The vote was 4-1, with the lone dissent in favor of steady rates. The bank warned that the balance of risks to growth were to the downside and said the inflation environment would permit further cuts ahead. Since then, core CPI inflation eased to a four-year low of 3.8% y/y in October. The swaps market is pricing in 125 bp of total easing over the next 12 months followed by another 25 bp cut over the subsequent 12 months that would see the policy rate bottom near 9.0%.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank releases the account of its October meeting. At that meeting, the bank cut rates 25 bp for the second straight meeting but stuck to its data-dependent guidance reiterating it “is not pre-committing to a particular rate path.” However, the bar for additional ECB easing is low as the ECB noted “the disinflationary process is well on track” while President Lagarde reiterated that risks to economic growth are tilted to the downside. Moreover, Lagarde confirmed the decision to was unanimous and highlighted there was more downside than upside risks to inflation. The swaps market is pricing in 150 bp of ECB easing over the 12 twelve months that would see the policy rate bottom near 1.75%. Guindos and Schnabel speak today.

The Bank of England is in no rush to cut rates. Yesterday, MPC member Mann noted risks of “pretty sticky” services inflation as well as the possibility of increased volatility in prices. She stressed that “For those two reasons I say that inflation has not yet been vanquished.“ The market sees only 15% odds of a follow up 25 bp cut in December to about 20%, while the OIS curve sees the policy rate bottoming at 4.0%. Mann and Bailey speak today.

Despite the relatively hawkish BOE, sterling has come under greater pressure. Cable broke below the 200-day moving average this week for the first time since May and has now broken below the August low near $1.2665. It tested the June low near $1.2615 today but support held. Clean break below $1.2825 sets up a test of the May low near $1.2445.

ASIA

Australia October jobs report was solid. Employment rose 15.9k vs. 25k expected and a revised 61.3k (was 61.1k) in September. This was driven by a 9.7k rise in full-time jobs and 6.2k increase in part-time jobs. The unemployment rate was steady at 4.1% for a third consecutive month and is tracking below the RBA’s December projection of 4.3%. The RBA’s view is that “further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate,” suggesting it’s in no hurry to start easing. Indeed, RBA Governor Bullock reminded participants during a panel discussion overnight “we’re going to stay restrictive enough until we think we’ve definitely got that downward trajectory [on inflation].” The cash rate futures market puts 80% odds of the first 25 bp cut in May 2025, while the OIS market puts the odds slightly higher at around 85%.

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