Source: Euronews

USD: Trump trades being unwound after latest polls

US election week is starting with a weak dollar across the board. Markets are still digesting the very soft payrolls numbers on Friday, which were highly affected by extreme weather events. Meanwhile, the latest polls suggest that the Democrats have regained some momentum in some swing states may have prompted some unwinding of Trump trades. Incidentally, a recent poll suggests that Kamala Harris is leading in Iowa, previously considered a red-leaning state. 

The average polls collated by ABC’s ”fivethirtyeight” signal that Donald Trump is ahead in all swing states except for Michigan and Wisconsin, but by less than 0.5% in Nevada and Pennsylvania. Assuming Harris secures all blue lock/lean states (226 electoral college votes), then winning Michigan, Wisconsin and Pennsylvania would be exactly enough to get to 270 votes and get elected. Iowa, should it flip to the democrats, may not make much of difference given it only grants six electoral votes (versus 19 for Pennsylvania). Our latest note on FX and the election can be found here.

Polling stations open tomorrow morning, and by 9:00pm ET/2.00am GMT polls will have closed in all swing states (Arizona, Georgia, Wisconsin, Pennsylvania, Michigan, Nevada, North Carolina). Markets will start moving early as counting starts, but expect delays due to the large number of mail-in ballots and potential electoral disputes. There is a chance the outcome of the election won’t be called before a few days; in 2020, the Associated Press declared Joe Biden the winner only on Saturday.

Despite some unwinding of Trump trades, asset markets are still broadly pricing in a Trump win. As things stand now, we expect the dollar to sell off if Harris wins, while the impact of a Trump win may depend more on the Congress composition. A Republican clean sweep can send the dollar higher, but probably by less than how much a Harris win could hit USD. The dollar might not rally at all if Trump wins but Democrats secure the house.

Another big event this week is the Federal Reserve's rate announcement on Wednesday. By then, the election results may have not been called yet, meaning the FOMC market impact could prove rather short-lived. As discussed in our FOMC preview, the Fed should cut by 25bp regardless of the US election result. Had it not been for the proximity of the vote, we would have argued a Fed cut would have been net-negative for the dollar, but the implications for FX of this Fed decision will only be assessed once the election volatility has dimmed down.

Expect volatility in USD crosses today and tomorrow as FX liquidity may tighten and large hedging positions may be re-assessed on the back of latest sentiment on the vote. Today’s momentum seems to be pointing to a weaker dollar, but things can turn rapidly in intraday trading. We retain a bias for a stronger USD today and tomorrow from this morning levels.  

EUR: Boosted by weaker dollar

EUR/USD is back up this morning after a rollercoaster ride on Friday as US payrolls were released. This week will all be about the US election with probably very little contribution by the eurozone calendar.

The US election implications for the euro aren’t only related to the dollar reaction. Markets have scaled back some European Central Bank dovish bets after the latest eurozone growth and inflation numbers, but probably remain open to pricing back in the chance of a 50bp December cut should Trump win this week. The rationale there is that the ECB will be more inclined to frontload easing given the risk of protectionism under Trump. At the moment, markets are pricing in 29bp of easing in December and an additional 30bp in January, which signals some residual bets on outsized cut remaining in place.

EUR/USD has briefly traded above 1.0900 this morning on the back of broad-based USD weakness. Pre-election volatility is dominating, but the still-wide rate differentials suggest the pair is expensive at these levels.

Elsewhere in Europe, we have seen EUR/NOK test our 12.0 near-term target, which likely mirrors some deterioration in FX liquidity conditions ahead of the US vote. The krone’s weakness will likely keep Norges Bank a hawkish outlier this week, with markets pricing in no risk of a cut at the Thursday meeting. Another development in the Nordics is the Riksbank meeting (also on Thursday). As per our preview note, we expect a 50bp in line with consensus and market pricing, and see only a severe post-US election SEK selloff potentially tilting the balance to 25bp.

GBP: Calm restored

Friday’s session seemed to signal that some calm has been restored in the gilt market, and that favoured a EUR/GBP decline back below the 0.8400 mark. Our short-term fair value model shows a rather modest risk premium of around 0.6% in EUR/GBP at the moment. As discussed last week, the pound and gilt markets are unlikely to face a rerun of the post-2022 mini budget crisis, but some gradual repricing higher in gilt yields on the back of wider expected borrowing can still weigh on the pound along the way.

On Thursday, the Bank of England announces policy and a 25bp is widely expected. Markets will probably be more interested in hearing what the MPC has to say about last week’s budget. While the Office for Budget Responsibility sees the announced fiscal measures are both pro-growth and inflationary, our UK economist does not expect them to significantly alter the BoE’s view.

For now, Governor Andrew Bailey may focus on the recent drop in services inflation and could try to drive the attention away from the budget and back to data. That could be read as a dovish signal for BoE rate expectations, and there is probably room for more easing to be added to the GBP swap curve, which is currently pricing in 32bp over the next two meetings. A dovish repricing can weigh on the pound this week, but should it also come with some lower long-end gilt yields, some inflows into sterling markets can offset selling pressure on GBP.  

CEE: Central bank decisions in the shadow of the US election

While the main focus this week will clearly be on the global stage, the calendar in the CEE region is also busy. After Friday's public holidays, we will see delayed PMIs in Poland and Hungary. Friday's numbers from the Czech Republic showed a surprising improvement and we could see a similar improvement today. October inflation numbers in Turkey have already been released this morning, showing another drop from 49.4% to 48.6 % year-on-year, slightly above market expectations (48.3%).

On Wednesday, we will see the National Bank of Poland's decision to leave rates unchanged at 5.75% and the governor's press conference a day later. Industrial production numbers for the Czech Republic and Hungary will also be released. The Czech National Bank meets on Thursday and we expect another 25bp rate cut to 4.00%. At the same time, the central bank will unveil a new forecast that should see some dovish revisions. The National Bank of Romania will wrap up this week's central bank meetings on Friday. We expect no change at 6.50% in line with market expectations.

The FX market will be mainly driven by the US election this week. We expect currencies to remain under pressure today and tomorrow with low liquidity as in previous days. EUR/HUF remains vulnerable, having stabilised around 408 for the last few days, but we think the market will continue to push the pair up. On the other hand, the current rebound of EUR/USD may dampen it, which could somehow stabilise the CEE market ahead of the US election result. We see this week's central bank meeting slightly negative for the CZK and neutral for the PLN. However, all this will likely be overshadowed by post-election repricing.

For an immediate reaction after the election result, the main channel through EUR/USD is clear. We discussed the longer-term impact on CEE in our US election guide for the FX market. Although the bias here is clear and in general, the Harris scenario is positive for CEE and the Trump scenario negative for CEE currencies, against the market we believe the Trump scenario in the longer term is not necessarily that negative for the region and will depend on the details. However, for this week we believe our view will be best reflected in PLN/HUF. The pair did not move much in last weeks and the market moved short in both currencies (more in HUF). We believe that in case of a Trump win, HUF will be hit the hardest, while in the case of a Harris win, PLN will have an easier road to recovery.

RBA policy to remain unchanged

The upcoming Reserve Bank of Australia (RBA) policy meeting on November 5 is highly anticipated, with the bank adopting a wait-and-see approach and holding the cash rate steady while monitoring economic developments. The focus will be on ensuring that inflation continues to decline and that the economy remains on a stable growth path, with potential rate cuts anticipated in early 2025 if conditions improve.

Inflation ticks down within target

Recent inflation figures show a mixed but overall encouraging pattern. In the September quarter, the headline inflation rate dropped to 2.8%, the lowest level in three and a half years. Significant drops in fuel and electricity prices, aided by government rebates, drove this decline. However, underlying inflation, measured by the trimmed mean, remains above the RBA’s target band at 3.5%. This persistent core inflation suggests that the RBA may need to maintain a cautious stance as service sector inflation, particularly in rents, insurance, and childcare, continues to exert upward pressure.

GDP and economic growth

The development of Australia’s GDP has been modest. The June quarter of 2024 saw a 0.2% q/q increase in economic growth, which is consistent with the ongoing trend of gradual but consistent expansion. The weakest annual growth since the early 1990s, with the exception of the pandemic period, was 1.5% in the 2023–24 fiscal year. Although government expenditure has provided some support, this lethargic growth is a result of subdued household consumption and a decline in discretionary spending.

Various factors, including international economic conditions, domestic inflation patterns, and labor market robustness, will influence the RBA’s decision. The recent decrease in headline inflation is promising; however, the RBA remains vigilant about the stickiness in underlying inflation and its possible effects on the economy. The GDP data underscore the necessity for ongoing support to foster economic growth and tackle the difficulties confronting households and companies.

Aussie stands near critical area

Investors will closely scrutinize the language and tone of the RBA’s statement, even though the immediate decision to hold rates might not cause significant movement. Investors will look for clues about future monetary policy direction, which will influence the Aussie’s trajectory in the coming months.

Aussie/dollar rebounded off the 0.6535 support level, which overlaps with the medium-term uptrend line, with the next strong resistance coming from the 200-day simple moving average (SMA) near 0.6620. However, a tumble beneath the diagonal line could open the way for a test of the bearish spike of 0.6360, achieved on August 5.

Last week was packed with earnings and data. Five of the Magnificent 7 stocks announced magnificent earnings. Some, like Google and Amazon, kept their investors on their sides, whereas others, like Microsoft and Meta failed to impress as their investors couldn’t get over the weaker forecast and further AI spending that they announced. Big Oil came up with lower profit but share buybacks and higher dividends at some of them helped weathering the bad news.

Then, the US GDP growth came in slightly lower than expected by analysts, at 2.8% for the Q3, but the consumer spending remained robust. And finally, on Friday, the US announced the official jobs data. The US economy ended up adding a meagre 12K jobs last month, the manufacturing and private nonfarm payrolls printed negative numbers. But the bright spot was that unemployment remained steady at 4.1% – suggesting that the NFP number probably took a one-off hit, and the wages continued to grow by 4% on a yearly basis – high compared to where the Federal Reserve (Fed) would like to see it, but well aligned with the market expectations. The market is now convinced that the Fed will announce another 25bp cut when it meets this week. That announcement is due Thursday, as before that we have the US election – on Tuesday.

Anyway, Friday’s NFP figure didn’t necessarily bring a relevant information on the table. The S&P500, Nasdaq and Dow Jones were better bid on Friday, but all three closed the week on a negative note. The US 2-year yield consolidated around 4.20% and the 10-year around 4.30% after the release. This morning, both are pushing higher, especially the 10-year yield – which spiked to 4.38% in Asia, as investors are closing their US treasury positions before the US election.

US election

The clock is ticking, and soon the suspense will break over who will be the next US president. Even though the prediction markets have been in favour of a Trump victory, the CNN poll this morning prints a 48% chance for a Harris win, versus 47% assessed to a Trump victory. The worst possible outcome for the market would be a too close race and a contested outcome.

In the short run, a Harris victory could bring relief to treasury and international markets, while a Trump victory could resonate louder – and not necessarily in a good way – for the euro and the European markets, due to the tariff threat. The Stoxx 600 index rebounded on Friday, but the index could bear the brunt of a potential Trump victory later this week.

In China, the Chinese equities start the week on a bullish note as the National People’s Congress began its five-day meeting, where policymakers are expected to provide more details on debt and fiscal initiatives to revive growth. There are media reports suggesting that China may announce a stimulus package exceeding 10 trillion yuan to boost economy. I can’t tell what amount of stimulus China will announce, if they put any number on it at all. But a Trump presidency could increase the size of the package and provide a safety net to Chinese investors in case of a Trump win.

USD offered ahead of US election

The US dollar kicks off the week on a bearish note. The USD index slid below the 200-DMA in Asia, the EURUSD is testing the 1.09 level at the time of writing, and Cable, which has been pressured by last week’s budget has jumped to flirt with the 1.30 psychological resistance. One of the safest harbours is gold, bid this morning near an ATH. The Swiss franc and the Swiss equity index are also seen as interesting defensive names in preparation of a contested US election outcome and heightened short-term volatility.

The USDCHF has been testing an important Fibonacci resistance – the major 38.2% retracement on May to September selloff and which should determine whether the pair should remain in the bearish trend or step into a medium term bullish consolidation zone. Last week’s softer-than-expected Swiss inflation and sales data came to reinforce the dovish Swiss National Bank (SNB) expectations, weakened the franc bears’ hands, but the crucial Fibonacci resistance hasn’t been pulled out, and the USDCHF bulls may have to wait until the US election dust settles to continue betting in favour of a weaker franc. For the equities, the Swiss market is heavy in healthcare, pharmaceuticals, consumer staples and financials. Therefore, Swiss equities should weather increased market volatility.

Elsewhere, oil kicked off the week better bid on weekend news that OPEC could delay the planned December increase to oil production by a month – or more – on the back of a persistent selloff in oil prices due to the unfavourable combination of weaker demand and strong output prospects. The Middle East rumours also hint at a possible revival of tensions between Iran and Israel – a factor that could help bring tactical long positions back to the market this week. But price rallies are considered as interesting top selling opportunities as long as the gap between demand and supply widens.

In focus this week

Today, in the euro area, we receive the Sentix investor confidence indicator, providing the first assessment of sentiment in November. Focus is also on the final manufacturing PMI data for October.

On Tuesday, the US election takes place and is the major highlight of the week. Donald Trump is the small favourite to win the presidential election according to prediction markets, Republicans are expected to win majority in the Senate elections and House elections remain highly uncertain.

On Wednesday morning, when we – hopefully – know the results of the US election, we will be hosting two conference calls where we present our instant view on the results and implications for markets and the economy: Conference call on the implications of the US election for Global and Scandi markets at 8:40 – 9:10 CET and US elections morning call – Macro need-to-knows at 9:15 – 9:30 CET.

Economic and market news

What happened overnight

In oil markets, oil prices gained more than 1 USD following the announcement made by OPEC+ to delay December output increases until January next year. Recently, the price of oil has been pressured by decreasing demand in China, rising external supply and the outlook of the conflict in the Middle East improving.

What happened over the weekend

In the US, nonfarm payrolls growth practically halted according to October Jobs Report released Friday morning. NFP grew by only 12k (cons: 113k, prior: 254k). US government bond yields and EUR/USD shifted higher, but rather modestly compared to the seemingly large negative surprise. Most other labour market indicators for October have still painted a rather positive picture, so perhaps it is a good idea to not give this single (potentially distorted) reading too much weight.

On the wage side, average hourly earnings increased by a solid 0.4% m/m SA, which means that wage sum growth continued despite the weak employment reading. The household measure of employment showed an outright decline in employment (-368k) but as the labour force also shrunk by 220k, unemployment rate remained steady at 4.1%.

Finally, the ISM manufacturing index painted a mixed picture, with weaker business activity of 46.5 (cons: 47.6%, prior: 47.2%), but stronger new orders, employment and prices paid.

In Sweden, PMI for the manufacturing sector surprised to the upside with 53.1 (prior: 51.3). The surprise contradicts the weak NIER survey of last week and is off the table as an argument for the Riksbank to make a 50bp cut on Thursday.

In Norway, the NSA unemployment rate for October dropped to 1.9% (cons: 2.1%, prior: 2.0%) beating market expectations and tightening an already tight labour market. Additionally, the number of new vacancies dropped following relatively weak growth for more than a year.

In Switzerland, inflation for October surprised sharply to the downside with headline at 0.6% y/y (cons: 0.8%, prior: 0.8%) and core at 0.8% y/y (cons: 1.0%, prior: 1.0%). Prior to the release markets were pricing a 37bp cut for the meeting on 12 December. On release, EUR/CHF jumped, driven by energy prices, hotels and the volatile component of international package holidays. While our base case is a 25bp cut in December and March, this increases the likelihood of a 50bp cut in December quite significantly.

Equities. Global equities were higher on Friday, yet still lower over the past week. As mentioned several times last week, numerous factors are currently at play, making it challenging to distinguish the true drivers from mere noise. Nonetheless, last week and particularly Friday presented some very interesting results. Bond yields dropped sharply right after the low Non-Farm Payroll (NFP) print on Friday, only to grind higher throughout the session and closed the day higher. In the short term, the risk of a red sweep in the upcoming election seems more important for bond market than macroeconomic factors.

Last week’s best-performing style was small-cap, despite higher yields. A red sweep would likely mean reduced regulation, or more precisely, diminished regulatory fears, which typically benefits small caps. Additionally, this season’s earnings from small caps have not been impressive. Again, in the short term, it appears that elections have a more significant impact on small caps than yields.

Banks performed very well last, which makes sense given the strong earnings and higher yields. However, for us, banks are one of the biggest beneficiaries of a red sweep. More fiscal spending, increased lending activity, higher yields, and less regulation are all advantages. Policies on immigration and trade will have very little effect on banks. Therefore, based on both fundamentals and politics, it is logical to see banks performing exceptionally well recently.

US main equity indices on Friday were as follows: Dow +0.7%, S&P 500 +0.4%, Nasdaq +0.8%, Russell 2000 +0.6%. Asian markets were mostly higher this morning, with Japan closed.

FI: A sharp rally in global yields was recorded following the weaker-than-anticipated NFP on Friday with just 12k new jobs in October. However, as markets digested the timing of the poll coinciding with hurricanes as well as strong prices paid figure of the US ISM, markets quickly repriced higher in yields. 10y UST ended 10bp higher at 4.38%, in a bearish steepening move. German yields were broadly unchanged on the day. German ASW spread continued its tightening and now stands at just 5.8bp.

FX: EUR/USD rallied above 1.0900 after the NFP release. The distorted data did not have a lasting impact though and the cross closed Friday’s session at day lows. Monday morning, one day before the US election, the cross is back at 1.09. Similarly, USD/JPY dropped briefly after the NFP, closed the week at day highs and is back below 152 this morning. Weak Swiss inflation numbers weighed on the CHF. The Scandies remain under pressure. EUR/NOK challenges two-months highs at 12.00 and EUR/SEK three-month highs at 11.65. Both crosses are sensitive to the US election outcome and the latter to the Riksbank decision on Thursday as well.