Fed tries very hard not to surprise the delicate little flowers that make up the money and bond markets

Outlook

We wrote ahead of the election that the Fed may hold the fort tomorrow and decline to cut rates as expected if Trump were to win. That was not realistic, if only because the Fed tries very hard not to surprise the delicate little flowers that make up the money and bond markets.

It’s also the case that the putative Dec rate cut would come before the new president takes office, although Reuters’ insightful Dolan writes that “… pricing now shows just 90 basis points of cuts over the year after that. That would put an implied 'terminal rate' for the Fed cycle as high as 3.75% - almost a full percentage point above what Fed policymakers themselves had indicated when they first cut rates in September.”

All the same, those who foresee an inflationary Trump regime have cut back betting on the Dec hike to a 67% probability from 82% last week.

We are about to get a flood of postmortems on why the American voter was so stupid as to elect this incompetent crook a second time. At a guess, they misremembered what the first Trump term was like. They were not better off. The inflation spike blinded them. It also blinded them to the favorable trajectory Biden started, too,

And the country is just too sexist and racist to elect a black woman, although there is a backlash against wokeness in there, too.  We are ashamed. ECR Research has an essay this morning titled “Revenge of the Deplorables.”

There is just one benefit: violence from Trumpies expected on voting day did not materialize. The expected assertions about fraud will not be forthcoming now that he has won. And while not a benefit, Europe is going to have to step up its game on defense and with respect to China.

Forecast

The risk to every price in the world has just soared, and rising risk means a rising dollar.

The longer-term outlook: Trying to consider the long-term currency outlook without referring specifically to the election is not realistic. Of course the election matters, and it matters a lot.

A Trump win means rising yields as the Treasury struggles to offset the giant rise in the deficit, which could mean credit agency downgrades, too.

The Trumnp tariffs mean not only rising US inflation, but retaliation from trading partners that could take some dreadful paths, such as China refusing to sell rare earths to the US.

And giving Ukraine to Russia and pulling out of NATO means far higher defense costs to Europe, Never mind that NATO is a treaty that takes Congress to change. The announcement effect alone is huge.

Firing Powell and replacing him with unqualified lackeys, and interfering with Fed decisions, means a loss of confidence in the US financial system, which is already pretty ragged around the edges. The stock market won’t like it.

These are just the tips of a clutch of icebergs. All of these outcomes have been hashed over repeatedly in the press, and account for some of the Trump trades.

In practice, outcomes will be dire. The economy is likely to fall into recession. Foreign capital will flee. Hell, domestic capital will flee.   

It is, therefore, with all this in mind that we report the latest FX forecasts from ECR Research. We are picking out just the parts pertaining to a Trump win.

To begin, “EUR/USD is unlikely to far exceed 1.10 for the time being and, overall, the pair will decline to 1.00- 1.05. However, should the Republicans be able to largely implement their plans following the election, the pair may rise rapidly after a while.” Unpacking this statement, a Trump win means 1.10, then 1.00 in the election aftermath, but then a rapid rise.

We ask “To where?” How about back to 1.2350, as we had in Jan 2021?

Skipping over the crossrates, let’s look at the forecast for the yen. If Trump wins, ECR sees 160 again and not lower than 150 as the BoJ does start to raise rates. Presumably this is because the US will have yields rising even more.

We see the general outline as correct, but the numbers are too small. A Trump win can mean the euro up over 1000 points and the yen far more than 160. We wonder if ECR is not underestimating the mess this guy is going to make.

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