Trump will move markets more than the Fed, per Bloomberg.
The US election, more than any other event this year, is poised to significantly impact markets, potentially surpassing the influence of actions taken by the Federal Reserve. Notably, Donald Trump secured a victory in the Iowa caucuses, consolidating his position for a potential second term. Concurrently, Federal Reserve Governor Christopher Waller indicated that the central bank anticipates rate cuts this year, albeit with a nuanced approach to timing and depth. While acknowledging the macroeconomic favorable conditions, Waller expressed confidence in navigating the delicate balance of reducing inflation without triggering a substantial rise in unemployment.
In the context of ongoing adjustments following last year's interest rate fluctuations, the 10-year yield aligns closely with its 200-day moving average and the starting point of the previous year. The foreign exchange market introduces an intriguing dynamic, where a substantial Fed easing typically weakens the dollar. However, recent trends defy this expectation, as the dollar has exhibited strength.
This divergence from expectations may be attributed more to Trump's influence than Waller's statements. Analysts, including George Saravelos from Deutsche Bank, suggest that much of the anticipated Fed easing has already been factored into the currency market. Consequently, further speculation about interest rates might have limited impact on the dollar. In contrast, the political risks associated with the upcoming election present a more potent catalyst for market shifts.
Several premises underscore the significance of the November election in shaping market dynamics. The stakes are widely recognized, acknowledging the profound consequences of deciding on a second term for Donald Trump. The immediate impact on the dollar appears to align positively with developments favorable to Trump, according to Alan Ruskin, a foreign exchange strategist at Deutsche Bank. This perspective reflects a belief that the "Trump effect" tends to be dollar-positive by default, particularly when contrasted with other major currencies like the euro, Chinese yuan, and Mexican peso.
The influence of the election outcome is especially pronounced in the case of the Mexican peso, which is highly exposed to the US and harbors concerns about Trump's potential policies. A Trump victory in 2016 had a notable impact on the peso, and history seems to repeat itself with the recent strength of the peso coinciding with uncertainties surrounding Trump's second term. Tuesday's market response, marked by the peso's significant reversal, echoes the dynamics observed in 2016 and underscores the sensitivity of currency markets to political developments.
