On pause to reassess ‘Trump operation’ – DBS

This month’s USD rally driven by the “Trump trade” risks overextending itself. The DXY Index and the 10-year US Treasury yield have returned to the late July levels from which they fell sharply before the first Fed cut in September. While Trump’s resurgence in the polls has fueled bullish USD sentiment, we remain cautious as the race to the White House remains tight, particularly in key states. In the fortnight before the 2016 election, the DXY corrected lower as early vote counts raised doubts about a Trump victory, notes Philip Wee, Senior FX Strategist at D.B.S..

DXY and US yields look elevated

“The Fed’s latest Beige Book noted that US economic activity has changed little in most districts since early September, in contrast to recent positive economic data. Many contacts highlighted uncertainty around the US elections on November 5, leading to cautious spending by consumers and delays in investment and hiring by businesses. Job growth was modest, driven primarily by replacement hiring. place of expansion.”

“Therefore, Fed officials view monetary policy as too tight and anticipate further cuts in November and December. Today’s Fed rate cut path differs from the Fed’s hiking cycle that began in December. 2016, following Trump’s victory. Another increase in US initial jobless claims today would support expectations of a further decline in nonfarm payrolls to 135,000 in October after the surprise increase to 254,000 in September.”

“Meanwhile, the US 10-year Treasury yield has returned to late July levels, raising concerns that rising yields may reflect deeper concerns about the unsustainable US fiscal situation, in rather than expectations of higher inflation driven by Trump’s tax plans and his fixation on tariffs. This concern could reflect the UK’s mini-budget crisis in 2022, where fears of reckless tax practices led the GBP to fall. to a historic low.”