US election risks are dominating markets amid a resurgent Trump. The betting odds for a Trump win has shortened markedly over October, and this is propelling US yields higher and lifting the USD. Polls from FiveThirtyEight now show Trump leading Harris for the first time in Pennsylvania and almost catching up to Harris in Michigan, which are two major swing states. A broad Republican victory under Trump entail raise risks of wider US budget deficits. The Committee for a Responsible Federal Budget has calculated that Trump’s proposed fiscal policies could result in USD7.5trn more debt over ten years, while Harris’s plans could add USD3.5trn of debt. Tariffs are also likely to be hiked by Trump, which could lift the USD, particularly against Asian exporter currencies.
Meanwhile, Fed officials including Schmid, Logan, and Kashkari had called for a more gradual pace of Fed rate cuts, giving uncertainty in the economy. Daly underscored that policy was still tight, and that she has not seen reasons to stop cutting rates. Markets have moved from pricing another 70bps of cuts this year at the start of Oct, to just 40bps of additional cuts. The adjustment of rate cut expectations is already substantive and had lifted the DXY towards 104, near its Aug high. The USD may not benefit as much from the trimming of rate cut expectations going forward.
China cut the 1Y and 5Y LPR by 25bps on Monday to 3.10% and 3.60% respectively. These cuts to benchmark lending rates were expected given a 20bps cut to the 7D reverse repo rate in late Sep, and are part of a broader policy push to stimulate growth in China. USD/CNH had surged to mid-7.13 levels amid broad USD strength, opening a gap with the onshore CNY fixing. RMB flows have become more two-way, after an earlier bout of equity inflows into China briefly led to a dip in USD/CNH below 7. We had flagged US election and trade risks as reasons to be restrained on RMB optimism earlier, and it seems the RMB market mood has indeed shifted amid a resurgent Trump.
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