November 06, 2024

“The election is not fully wrapped up just yet but, with 267 electoral votes, the markets are treating a Trump win as a certainty. We are seeing all the hallmarks of the ‘Trump trade’ as a result: a stronger dollar, higher US yields, and a battered euro.”

Tim Hallinan – Trading Director

USD

America has (almost) decided, and with Georgia, North Carolina, and Pennsylvania in Trump’s hands, the dollar has rocketed across the board this morning as the markets have moved to fully price a Republican win. The tight, drawn-out race many were expecting never materialised. As it stands, Trump is winning the electoral college vote by 267-224, the Senate has been called red, and the House is looking increasingly likely to complete the full sweep. This is the full-Trump scenario: the 10-year Treasury yield is up 15bps, the dollar index is up 1.6%, and Fed rate cut expectations are being trimmed for next year. The euro has been the worst hit (-1.7%) but the entire G10 is down by over 1%, barring Canada, which tends to move more in line with the dollar’s strength.

The longer-term structural shifts in FX now depend on the extent to which Trump follows through with the big tax cuts and blanket tariffs that he promised. While some have suggested that tariff threats are more of a negotiation tool, other aides see them as the solution to the US’ trade anxieties. It sets the stage for a structurally higher Fed funds rate, hotter inflation, trade wars, tariff-based currency depreciation, and – according to the economist consensus – lower global growth.

GBP

Sterling has slumped by 1.3% in response to Trump’s likely presidency win. But as flagged yesterday, it has strongly outperformed the euro, with GBP/EUR up nearly half a percent. The UK is more insulated to the impacts of Trump trade policy and the Bank of England is less likely than the ECB to be swayed by the growth shock. Another leg up could come from the BoE rate decision tomorrow, where markets will be looking for indications about how the budget has affected policymakers’ calculus

EUR

The euro is the worst performing G10 currency this morning, with markets anticipating that the open, stagnant eurozone economy will face some of the biggest headwinds by Trump’s tariff policies. Whereas US yields have surged at the prospect of inflationary fiscal policy, German yields have slumped in anticipation of a weaker growth picture and a quicker pace of ECB easing. The euro has weakened even against SEK and NOK, two of the least liquid and most volatile currencies in the G10.

Markets

The market has interpreted a likely Trump win as positive for risk assets. S&P 500 futures have surged to record highs, oil has fallen, and Tesla shares have rocketed by 14% in anticipation of big tariffs on Chinese EVs.

Main Economic Events (All Times CET)

10:00am: Eurozone Final PMI
3:00pm: ECB’s Lagarde speaks

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