USD: Strength
USD remains strong, driven by short-term rate differentials. The EUR-USD two-year swap spread has widened from 85bp to 130bp in three weeks, pushing EUR/USD toward 1.09. The Fed has signalled low confidence in the September 50bp cut, with Bostic suggesting November might be a pause. Strong NFP data and rising Trump election odds have further bolstered the dollar.
- Despite what Donald Trump might say about the dollar (wanting it to be weaker), his policies are broadly dollar positive.
- Short-dated US rates may not rise much further from here barring exceptional news.
- Key risk events: Thursday’s US retail sales and ECB meeting.
Election Trades Rundown
Speaking of Trump, here is a partial rundown of the two election trades.
- Trump Trade: Buy USD (tariffs, fiscal expansion), sell EUR, sell AUD (and other China proxies), sell bonds.
- Harris Trade: Buy bonds, sell USD.
- Tariffs, immigration, and fiscal policy are diametrically opposed between the two candidates. Trump’s policies are inherently inflationary (tariffs, tax policy), while Harris’s policies suggest looser fiscal and immigration policies.
With Trump’s odds rising, markets may continue to price in higher USD and weaker bonds. Expect these markets to move in response to shifts in election probabilities.
AUD and China: Wait and See
AUD CFTC positioning is extremely long and it is highly dependent on China’s stimulus narrative. The correlation between AUD, copper, and Chinese equities remains intact but may weaken if China’s stimulus fails to live up to expectations.
- “We prefer to position for the Aussie to rebound on China-related selloffs, unless the ‘policy put’ fades,” said Lenny Jin, a strategist at HSBC Holdings Plc in Hong Kong.
- “The position flip to longs is understandable, but it has to navigate a lot of consequential risks in coming weeks,” said Richard Franulovich, head of FX strategy at Westpac Banking Corp. “I’d prefer to be square” and go long Aussie at better levels toward support at 66.30 cents.
Over the weekend markets had anticipated up to 2 trillion yuan ($283 billion) in fresh fiscal stimulus, but the lack of a clear figure has kept investors cautious. Goldman Sachs upgraded China’s 2024–2025 growth outlook, citing an increased policy focus on growth.
- “At a much-anticipated briefing on Saturday, Finance Minister Lan Fo’an vowed new steps to support the property sector and hinted at greater government borrowing. While authorities refrained from giving a headline dollar figure that investors had sought, Goldman Sachs Group Inc. saw the latest measures as a sign of increased policy focus on growth.”
EUR: Grim Data But Limited Downside?
Eurozone data has been weak over the past few months, and markets are now pricing in an ECB deposit rate cut to 2.00% next summer. However, there is a possibility that the ECB does not ease as aggressively as expected, which could limit further downside for the euro.The EUR-USD swap spread has widened, but it is unlikely to diverge much further unless there is a sharp increase in oil prices or inflation surprises to the upside. In the near term, EUR/USD is likely to find support around the 1.0850–1.0900 area, with some potential for a rebound if the ECB meeting this week turns out to be less dovish than what markets are currently expecting.
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