3 Reasons for USD Rebound

We look at three reasons why markets made an astonishing comeback in the aftermath of Trump's victory. The British pound was the top performer while the Aussie lagged. Japanese machine orders data is due next. The RBNZ made a not-so dovish rate cut of 25 bps. Ashraf's Premium Insights opened one trade an in an equity index. There are 7 trades in progress. 

The executive and legislative branches of the US government are united behind Republicans. That result will break the gridlock in Washington and unlock the fiscal reserves of the United States.

As the results were first counted yesterday we wrote that eventually there would be a case for buying the dollar on fiscal stimulus because of an all-Republican House, Senate and White House. That sentiment unfolded much more quickly than anticipated as USD/JPY rallied more than 550 pips from the lows and S&P 500 futures rebounded 134 points.

Evidence of change in expectations on fiscal spending was in the bond market, which was absolutely battered. Thirty-year note yields rose 24 basis points to 2.85%; that's the highest since January and the largest one-day rise since 1996.

Second is that Trump struck a gracious tone in his victory speech, especially toward the Republican establishment. He talked about infrastructure spending and taking care of veterans while avoiding his more-contentious issues. That was taken as a sign he may abandon them.

Third is that it's easier to separate winners from losers in the new regime. For instance, shares in defense, infrastructure construction, prisons and pharma jumped Wednesday. Aside from Mexico, it's tougher to pick out losers. Yes, Trump may punish companies that move production offshore but, for now, the market thinks he will back down.

All of this requires a leap of faith and selective blinders. The risks relating to trade, taxes and foreign relations are real. Moreover, the bulk of the Republican establishment has been preaching fiscal discipline for 8 years. They may not be so keep to run larger deficits.

In the short term, Japanese futures suggest a huge rebound in the Nikkei. In terms of economic data, Japanese Sept machine orders are due at 2350 GMT and expected to fall 1.5% m/m but rise 4.1% y/y. Expect Presidential fallout to continue to dominate.