Pausing to reassess the ‘Trump Trade’ – DBS

This month’s USD recovery driven by the “Trump Trade” risks becoming over-extended. The DXY Index and the US Treasury 10Y yield have climbed back to the levels in late July from which they sharply declined before the Fed’s first cut in September. While the resurgence of Trump in the polls has fuelled USD bullish sentiment, we remain cautious as the race to the White House remains tight, particularly in the swing states. In the fortnight leading to the 2016 election, the DXY corrected downward when early vote counts raised doubts about a Trump victory, DBS’ Senior FX Strategist Philip Wee notes.

DXY and US yields looking lofty

“The Fed’s latest Beige Book noted that US economic activity has changed little across most districts since early September, contrasting with recent positive economic data. Many contacts highlighted the uncertainty surrounding the US Elections on November 5, leading to cautious consumer spending and business delays in investing and hiring. Employment growth was modest, primarily driven by replacement hiring rather than expansion.” 

“Hence, Fed officials consider monetary policy as very tight and anticipate further cuts in November and December. Today’s Fed rate-cutting trajectory differs from the Fed’s hiking cycle that started in December 2016, following Trump’s victory. Another rise in today’s US initial jobless claims would support expectations for a renewed drop in nonfarm payrolls to 135k in October after the surprise rise to 254k in September.” 

“Meanwhile, the US Treasury 10Y yield has returned to late-July levels, prompting concerns that rising yields may reflect deeper worries about America’s unsustainable fiscal situation, rather than expectations of higher inflation driven by Trump’s fiscal plans and fixation with tariffs. This concern could mirror the UK mini-budget crisis in 2022, where fears of imprudent fiscal practices led to the GBP’s plunge to a lifetime low.”