Dollar & Yields Hit Multi-Month Highs on Trump Trade

The US dollar has jumped to fresh 3-month highs versus the yen on 23 October as betting odds increasingly favour a Trump victory in the upcoming election. Additionally, US Treasury yields surpassed 4.2% for the first time since July on 22 October.

‘Trump Trades’ Before the US Election

The US dollar has jumped to multi-month highs with betting odds for the US election increasingly pointing towards an election victory for former President Donald Trump.

The USD/JPY touched a 3-month high while the USD/CHF broke over a 2-month peak this week in anticipation of the election to be held next week on 5 November.

Source: Plus500 WebTrader

The yield on the benchmark 10-year US Treasury note climbed above 4.2% on 22 October, marking the first time it had reached this level since 26 July. Meanwhile, the 2-year Treasury yield rose to 4.06%, its highest since 20 August.

USD and Election Betting Odds

PredicIt betting odds, provided by the well-known betting service that allows its users to predict the outcomes of events, currently show Trump leading with 55 cents to Harris’s 51 cents. However, 538.com’s national poll still gives Harris a slight edge, polling at 48.6% compared to Trump’s 46.0%. The margins in key swing states are even narrower.

These market moves imply that investors expect possible Donald Trump policies, including higher tariffs, to be inflationary. Higher inflation could force the Federal Reserve to keep interest rates at elevated levels for longer, usually a positive for the US dollar.

Yields React to Politics and Economics

Strong economic data from the United States over the past month has led to a reassessment of the bond market, with investors lowering their expectations for significant rate cuts. 

However, rising bond yields now indicate an increased possibility of Republican dominance in the upcoming election. Markets seem to be predicting a “red wave” scenario that could be beneficial for equities but might also drive longer-duration yields higher.

JPMorgan strategists foresee rising 10-year yields in three out of four potential election outcomes:

1. A Republican sweep, for instance, could push yields up by 40 basis points, driving them to 4.6%, a level not seen since May. 

2. In contrast, a Trump victory with a split Congress might result in a 10-basis point increase. 

3. Interestingly, a Harris-led Democratic win paired with a divided Congress is expected to have no impact.

4. However, a full Democratic sweep could add 20 basis points. (Source: Forbes)

(Please note, any financial projections and/or assumptions have been provided for illustrative purposes only and must not be relied upon.)

Central Banks: The Fed vs ECB

On 18 September, the Federal Reserve cut the federal funds rate by 50 basis points, to a range of 4.75%-5%. 

The moves in the US dollar and US Treasuries perhaps run counter to conventional wisdom about the reaction to Federal Reserve policy. 

For example, a bond already paying a 5% yield suddenly looks very appealing because rates have dropped, sparking higher demand for it. As more people buy the bond, its price increases due to the higher demand, but the yield (which moves inversely to the price) falls. So while the price of bonds rises, their effective yield should fall.

Alongside the US election, part of the explanation for the rising US dollar could come from the action taken by other central banks. The euro has been falling since the European Central Bank cut interest rates on 17 October for the third time this year.

Conclusion: A Tight US Election Race

Although betting markets are increasingly pointing to a win for former President Donald Trump in the November election versus Vice President Kamala Harris, polling indicates the result is still in the balance. As such, markets could be subject to volatility with opinions shifting quickly as the election draws nearer.