The Buck Continues To Bound Higher

WHERE WE STAND – Another day, yesterday, of relatively broad-based USD gains, as the ‘Trump Trade’ rolled on in the G10 FX arena, with both US growth and inflation expectations continuing to re-rate higher.

Momentum, as it has done all year, is also playing a pivotal role here, with fresh USD highs bringing more bulls to the party, maintaining something of a virtuous cycle for the buck. As a result of this, yesterday saw the DXY rally north of the 106 handle, while Bloomberg’s broader proprietary USD index, which also includes a handful of EMs, traded to its best level since 2022.

I still see it as tough to bet against the buck at this stage, with the idea of ‘US exceptionalism’ only gathering strength amid expectations that fiscal stimulus in the first 100 days of the second Trump Administration will provide a further fillip to growth. A cool CPI print today could present a ‘bump in the road’ for the greenback, though I’d argue that Friday’s retail sales print is more pivotal, given the importance of solid consumer spending in ensuring that broader economic growth remains resilient.

While US macro news is looking increasingly positive, the same cannot be said of the eurozone. Political uncertainty is the latest factor to blight the common currency, which we can add to a rather long ‘laundry list’ of other downside risks, including – the potential for inflation to undershoot the ECB’s target; ongoing geopolitical events in Ukraine and the Middle East; the lack of any notable recovery in China; and, the threat of Trump slapping tariffs on the bloc. I’m sure I’ve missed some from that list, such is its length!

Anyway, the political events in question of course come from Germany, where a ‘snap’ election will now be held next February. I feel ‘snap’ may be stretching it a bit, but that’s still 7 months earlier than had been originally planned. Of course, the German economy was hardly in the rudest of health before this dollop of political uncertainty, which is only likely to further depress near-term growth prospects, as evidenced by yesterday’s ZEW survey, where the expectations metric fell to a paltry 7.4,

Calls for EUR/USD to trade at parity seem to be growing louder, and understandably so, though I feel such expectations are a little punchy for now. Still, I’d be happy selling any EUR rallies for the time being, as we grind ever closer to the 1.05 mark, below the fresh 12-month lows printed yesterday.

Outside of FX, it was moves in the Treasury complex that caught the eye, with a rather brutal sell-off taking hold across the curve. The belly underperformed, with 5-10 year yields trading as much as 15bp higher, as benchmark 10s rose to 4.45% once more, as the curve in its entirety bear steepened. Treasuries do seem rather cheap here, though, with a 4.35% 2-year yield, and 4.45% 10-year yield, appealing given continued disinflation, and the Fed continuing to take policy back to a more neutral setting.

Meanwhile, despite the ‘Trump Trade’ being evident in both FX & FI, the same cannot be said of the equity space. The S&P 500 was unable to make it 52 record closes for the year, ending the day around 0.3% lower. Furthermore, the rotation out of tech, and into value, which had dominated Monday’s trade rather ran out of steam, with the Russell 2000 notably underperforming on the day.

Finally, crude traded marginally firmer, with Brent reclaiming $72bbl, despite OPEC cutting their global oil demand forecasts for the fourth month running. This could well be a case of demand expectations already being so pessimistic, that there is little more bad news to be priced in.

Still, with 2024 consumption estimates down by almost a fifth since July, China still in the doldrums, and potential supply hikes coming at the start of December, I struggle to find a bull case for crude here. That said, with tensions in the Middle East having high potential to flare up in the ‘blink of an eye’, short crude positions warrant caution, and I’d certainly not be keen on running any weekend risk.

LOOK AHEAD – It’s ‘CPI Day’ today, though I must admit that the monthly US inflation figures are not exactly the huge market-mover that they were earlier in the cycle. Chiefly, this owes to the FOMC having obtained sufficient confidence in inflation moving towards the 2% target, on a sustainable basis, over the medium-term, and subsequently having pivoted to make labour market developments the key driver of policy shifts going forward.

Nevertheless, the pace of headline inflation is seen quickening in October, to 2.6% YoY, up 0.2pp from September’s rate, though the bulk of this increase will come as a result of higher energy prices. Core inflation, consequently, is seen holding steady at 3.3% YoY, and 0.3% MoM. While the figures might cause some knee-jerk intraday vol, I can’t imagine today’s CPI print materially shifting the Fed policy outlook, with a 25bp December cut remaining my base case.

Away from CPI, today’s docket is a relatively quiet one. BoE MPC member Mann will be speaking, likely to explain her dissent in favour of holding rates steady at last week’s policy meeting. A handful of FOMC speakers are also due, though nobody is especially likely to deviate from the now well-established ‘data dependent’ script.