Presidential Election Review
The US presidential election resulted in a smashing Trump victory with republicans also winning the senate and the house in a so called “Trump sweep”. The dollar strengthened roughly 200 points with Bond yields collapsing 20 bps.
The primary reason markets reacted more than we suspected was due to a Poll from Iowa1 that increased Harris’ odds momentarily.
Overall, in FX and bonds, market was quick to price in Trump victory after Florida was out alongside Trump securing Georgia with surprisingly large victory margins. USD strengthened near vertically for three hours, consistent with previous two elections.
However, as discussed in our preview2, USD and yields reverted in a “buy the rumour, sell the fact” reaction and have since then staged another epic rally. We argued that given the Trump trade was partially in price, it left the FX market susceptible for a retrace.
Where are we going from here?
The Trump sweep is by far the most bullish outcome for the USD, and positioning has been cleared out now. A potential argument for now against the dollar is that there’s a lot of uncertainty about Trump’s policies, the Fed still proceeding with rate cuts in a soft-landing environment and that the long USD is a massive consensus bet.
We find the opposite argument more compelling in the longer term. He will probably get the fiscal policy through, and he will get some de-regulation done, and the market must discount that. While the Fed will probably proceed with rate cuts in the near-term, this is likely to result in a much shallower cycle next year than originally anticipated.
The last time Trump got elected, USDX strengthened 600 points across a month. The DXY has been in a range for almost two years now and this might caution people against betting on the dollar. However, we suspect the animal spirits prevailing this time and dollar upside to accelerate.
Regardless, any disappointments on the policy making front will have an asymmetric reaction (i.e. dollar downside), but since it will take another few months until he has filled all the positions and enacted policies, the market has plenty of time to price the fiscal stimulus in.
