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FX Update: Pondering post-US election outlook
John J. Hardy
Chief Macro Strategist
Summary: Currencies have chopped around since the US election as the initial massive US dollar surge was partially reversed, if not enough for traders to draw conclusions. The week ahead may help the market resolve the USD direction for now.
A quick rundown of the very hectic week that was and what we’re looking for next week.
RBA Meeting: the RBA sticking to its guns on holding for now, with most AUD action focused on the prospects for China stimulus (see below).
US election – we got a resounding victory for Trump, with the full Trump 2.0 now realized, even if we House won’t be called officially for the Republicans for another day or more, giving the Republicans the trifecta of control that allows them to pull all policy levers. The market reaction has churned viciously, first producing the massive USD surge as widely expected in such a scenario, but that rapidly faded yesterday, likely on the related collapse in implied volatilities. We’ll know more next week, but for now, we watch the US treasury market closest for implications for FX after the surge in yields also retreated. Big headline risks from here on out when Trump is in charge.
Bank of England meeting- the Bank of England cut 0.25% as expected but warned that the budget announced the prior week would add “just under 0.5%” to inflation in between mid-2026 and early 2027, boosting UK yield expectations. Sterling responded strongly versus the Euro – with EURGBP ending this week close to the cycle lows.
FOMC meeting – Fed Chair Powell obviously wanted this to be a non-event and he largely succeeded after the Fed delivered the expected 25 basis point cut. With mixed data and a possible dramatic new policy impulse on the way from Trump 2.0, the Fed will want all of the optionality for moving the policy expectations in either direction. The December staff projections and the management of the message are going to be interesting to watch the month before the Trump administration gets going. Some firm responses from Powell on the legality of the President firing him – watch this space.
German politics – a watershed moment this week as Social Democrat Chancellor Scholz fired Finance Minister Lindner, who is also the leader of the FDP party that is in the governing coalition. Lindner was keeping a tight fiscal stance that Schols found unacceptable. Scholz has guided for a January 15 confidence vote that would almost assuredly fail, ushering a maximum 60 day countdown to new elections. Opposition leader Merz of the CDU is railing for an immediate confidence vote, sensing an opportunity for a strong CDU victory as the governing coalition partners are profoundly unpopular. Longer term, this could possibly get very intriguing for the Euro – Germany desperately needs to dig itself out of its old ways and invest in new infrastructure and cheaper long-term energy. It has massive fiscal room if it chooses to go that route and this would be EUR-supportive. No signs that the market is picking this up at all right now, but definitely something to watch from here.
Norges Bank and Riksbank. The NOK and SEK bottomed out on US election day and recovered mush of recent losses in the wake of the election as there was a general release of “fear levels” which helped provide some bounce-back in these two currencies. The respective central bank meetings produced the expected non-move from Norges Bank, which is perhaps behind it strong outperformance versus SEK since, as the Riksbank continues to hammer on the easing lever with another 50 basis point chop and expectations for more to come in December and early next year.
China stimulus announcement. Considerable speculation on this week, all leading to very little as the announcement on Friday was a damp squib: very large amounts aimed at bailing out debt-addled local governments, and nothing in the end-demand stimulus department. Some observers make the comment that China is biding its time to see what Trump delivers on tariffs before making any more dramatic move.
Chart: USDJPY
USDJPY leapt higher on the resounding Trump 2.0 setup post-election, but has stumbled since as the market second guesses how much of the trade is already priced into US treasury yields. The line in the sand now for US 10-year yields and USDJPY now is at the approximate 4.50% and 155.00 levels, respectively.
A few words on next weeks’ event risks: (times are GMT where shown):
There will be a number of Fed speakers next week – stay tuned day-to-day on our Market Quick Take for those.
China Oct. CPI and PPI (Saturday 0130). AJust an interesting data point to watch for the scale of deflationary risks in China, with PPI expected at -2.5% YoY and CPI at +0.4% YoY
UK Sep. Earnings and Employment Change, October payrolls change (Tue 0700). There has been some conflicting data here on payrolls (not looking great) versus the employment change (a strong recent surge), but watching earnings closely for the inflation outlook, as they were still running at 4.9% YoY in August, expected to dip to 4.7% for the September data.
Germany Nov. ZEW Survey (Tue 1000). The present situation is running near the record lows during the pandemic – Germany is at rock bottom – is the only way up soon?
US Oct CPI (Wed 1330) – an interesting one to see how reactive the market is to present data relative to anticipation of Trump policy announcements. The September data spooked slightly with higher core readings.
Australia Oct. Employment Data (Thu 0030). The unemployment rate expected unchanged at 4.1% China’s economy and moves in commodity markets will be important from here on out.
Sweden Oct. CPI (Thu 0700) – the low inflation readings of recent months in a weak economy has the Riksbank comfortable with its aggressive easing policy. They may only cast an eye on the currency if EURSEK threatens above 12.00. By the way – watch SEK responsiveness if anything interesting develops on the German fiscal front, re the comments on German politics above.
US Oct. PPI (Thu 1330) – gets less interest than its CPI cousin. Interesting perhaps to note that core PPI has been rising since early this year – expected at 3.0% YoY for October.
Bank of Mexico rate announcement (Thu 1900) Expected to deliver another 0.25% chop to 10.25%. USDMXN was unchanged after a spring higher post-election result, showing that the market had already hedged short-term fears of a Trump victory. The 20.00 level in USDMXN remains pivotal. Lots of headline risk as Trump forms a cabinet and talks up his plans.
US Oct. Retail Sales (Fri 1330). These were solid in September – not generally a report the market responds strongly to.
US Sep. Industrial Production and Capacity Utilization (Fri 1415) Not a report the market traditionally pays attention to, but the manufacturing side of the US economy is in the doldrums – the whole network of regional manufacturing surveys and this kind of data may be far more interesting to watch at some point well into the Trump 2.0 administration.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 4 is quite strong and above 6 very strong.
Gold was the big loser on the election – with 20/20 hindsight it was serving as a safe haven perhaps and the release of volatility almost across the board in assets has seen a sharp correction lower there. A move from 9.5 to 1.0 in the space of less than two weeks! The US dollar sits with the strongest upside trending reading post-election.
Table: FX Board Trend Scoreboard for individual pairs.
Realized volatility picked up across the board on the election result, although implied volatility has collapsed, so interesting to watch the trends that establish from here. Latest Market Insights
Commodities