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A Trump win represents a vote for change in US policy over the continuity represented by the Harris campaign. We view Trump’s victory, with Republicans appearing on course to take control of Congress, as the most USD positive outcome of the US election. The potential for significant policy change ahead on tariffs and immigration after the January inauguration will likely prove inflationary. Already, markets are scaling back Federal Reserve (Fed) easing expectations, lifting US yields and the USD. The flipside to USD strength is FX weakness elsewhere, reflecting the downside risks to economic growth outside the US amid higher tit-for-tat tariff risks.
Exhibit 1: Stronger USD as Trump policy agenda led to a scaling back of Fed easing expectations
Source: Bloomberg, Bank of Singapore.
We cannot know for sure the timing and sequencing of policy implementation. It seems reasonable to assume that tariffs and immigrant repatriations would come first since the president has broad discretion on trade and immigration policy. If the Trump administration can quickly bring forward tax cuts to offset the negative growth effects from tariff and immigration, there is potential for an even more bullish USD outcome that could see EURUSD dropping below parity over the next twelve months.
President-elect Trump has publicly expressed a desire for a weaker USD. Potential USD headwinds could include concerns that Trump would talk down the USD or call for lower US interest rates. But we would expect bullish USD forces to win out initially.
The EUR has been noticeably weaker, perhaps because of the prospect of higher tariffs but likely also concerns over Trump’s stance on Ukraine and NATO. Disengagement by the US on the Ukraine war could create a funding gap which Europe might need to fill. Trade uncertainty is also unhelpful for the stagnating euro area economy and could increase the risk of bigger rate cuts by the European Central Bank (ECB).
We expect the GBP to hold up better than its European peers like the EUR and CHF. The recently announced fiscal expansion should help to keep the UK macro backdrop resilient and support the case for a gradualist Bank of England (BoE) approach to rate cuts.
Exhibit 2: Rising tariff risk could fuel greater China fiscal support to temper CNY depreciation pressure
Source: Bloomberg, Bank of Singapore.
The CNY will likely have to confront tariff risks under the next US administration. Rising tariff risk could fuel greater fiscal support than what has already been announced to temper CNY depreciation pressure. With the CNY being a key regional currency anchor, CNY weakness tends to have spill-over effects on other Asian currencies, especially trade-exposed currencies like the SGD, MYR, THB and KRW.
The China slowdown has had a muted impact on the rest of Asia so far, owing in part to the shifting of production (relocation) and transshipments to outside of China. The US now looks likely to be more sensitive to these shifts, posing additional downside risks to Asian currencies if the US extends tariffs to these countries. While the CNY could be under pressure to depreciate, the People’s Bank of China (PBoC) will manage the timing and the pace, in our view. We expect the PBoC to restrain CNY weakness before allowing bigger adjustments once the actual tariffs are announced.
Exhibit 3: The BoJ, as a hiker in a world of other central banks cutting, should help limit JPY weakness
Source: Bloomberg, Bank of Singapore.
The JPY has also weakened alongside rising US yields. What happens next to USDJPY will depend on how far US yields rise. But further JPY weakness could lead to growing public dissatisfaction with inflation. Levels of USDJPY between 155-160 seem to be uncomfortable for the Japanese authorities. Risk of official JPY-buying intervention along with the prospects of greater Bank of Japan willingness to deliver additional rate hikes due to increased inflation risk might limit the pace of the JPY’s depreciation.
Amongst the low-yielders, we prefer the CHF to JPY as the funder of choice. Amid rising pressure on Swiss exporters from trade uncertainty and given the pronounced disinflation in Switzerland, risks are more toward Swiss National Bank (SNB) easing, raising questions of whether negative Swiss interest rates could return.
Exhibit 4: Australian labour market tightness (vs pre-pandemic) remains an outlier
Source: Bloomberg, Bank of Singapore.
The AUD will not be immune to rising risks of US tariffs on China, which is a potential headwind to the Australian economy. But China’s fiscal stimulus should provide some positive offset. Australian economic growth has slowed, but not all that much - for example the labour market is holding up better than most peers and remains meaningfully tighter than pre-pandemic. With the Reserve Bank of Australia (RBA) set to lag other major central banks in cutting rates, the AUD should remain supported against its G10 commodity peers like the NZD and CAD, which face more dovish risks.
This article was first published by Bank of Singapore on 14 November, 2024. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of OCBC Private Bank or its affiliates.
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