The DXY Index fell for the first time in four days by 0.36% to 104.06. This month’s USD recovery on the Trump Trade petered out after the DXY and the US Treasury 10Y bond yields returned to late July levels. Unlike the 2016 elections, the present-day greenback is not underpinned by the start of a Fed hiking cycle in December 2016. Today, the Fed started a rate-cutting cycle with a 50 bps cut last month and pencilled cuts in November and December. Although the Fed enters a blackout period next week before the FOMC meeting on November 7, consensus expects US nonfarm payrolls(out on November 1) to decline again to 120k in October; reversing the surprise increase to 254k in September that drove this month’s USD recovery.
In contrast to the Fed’s dovish outlook, the narrative driving higher US bond yields has shifted toward concerns about America’s unsustainable fiscal situation, which is harmful to the USD. When Trump was elected in November 2016, the US federal debt held by the public was 76% of GDP, a figure expected to approach 100% by the end of this year. According to the Committee for a Responsible Federal Budget, Trump’s tax and spending plan would add twice as much new debt compared to Harris’ proposals. Meanwhile, early vote counts could add uncertainty to the elections, with Real Clear Politics showing a 3% drop in betting odds for a Trump victory vs. a 4.2% rise in Harris’ odds.
Within the DXY basket, the JPY benefitted most from the greenback’s overnight weakness, appreciating by 0.6% appreciation to 151.83 per USD. Part of this gain was attributed to Japan’s upcoming snap elections on October 27. Polls indicate that Prime Minister Shigeru Ishiba may struggle to retain the ruling Liberal Democratic Party-Komeito coalition’s majority. Ishiba’s earlier remarks that Japan did not need more interest rate hikes contributed to the JPY’s decline earlier this month. The Bank of Japan is expected to keep rates unchanged at its October 31 meetingafter Tokyo CPI inflation declined to 1.8% YoY in October from 2.1% in September. JPY bears also face intervention risks following Finance Minister Katsunobu Kato’s warning of one-sided rapid speculative moves in the forex markets. However, USD/JPY must break below the support level at 151.42 (its 200-day moving average) before pushing below psychological 150 level (also its 300-day MA).
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October 25 in history
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