Following the US election, there has been a significant unwinding of the market move in the US Dollar (USD). However, analysts believe that this adjustment is more of a positioning shift rather than a complete reassessment of what a Trump presidency means for global markets. Prior to the election, markets were already pricing in a Trump victory, so the spike in the USD following the Republican clean sweep was not unexpected. Now, with the focus shifting back to macroeconomic discussions, there are questions about how far the USD can rally in the near term.
Despite the recent adjustments, the USD remains in a strong position, especially from a rate perspective. The Federal Reserve cut rates by 25 basis points, in line with market expectations. While this move had a marginal impact on the FX and rates markets, there was a brief firming in the USD and a slight rise in yields. Chair Jerome Powell’s comments on the US economy also contributed to the positive outlook for the USD. With the two-year USD swap rate nearing 4%, any further weakening in US data sentiment would be needed for markets to lower these rates.
As the market goes through an adjustment phase post-US election, there are potential opportunities for pro-cyclical currencies that offer attractive yields to perform well in the near term. One such currency is the Australian Dollar (AUD), which appears to be well-positioned. Market analysts do not see the impact of US protectionism as an immediate threat, and the stimulus from Beijing can benefit China proxies. This combination of factors could support the AUD’s performance in the coming months.
Overall, the focus is shifting back to macroeconomic discussions and the broader market sentiment. While the USD remains strong from a rate perspective, the recent election move has prompted an adjustment phase in the market. With volatility decreasing, there are potential opportunities for certain currencies to perform well in the near term. The AUD, in particular, seems to be in a favorable position given the current market conditions and economic outlook.
In conclusion, the recent unwinding of the election move in the USD has sparked discussions about the currency’s future performance in global markets. While the USD remains strong, there are opportunities for other pro-cyclical currencies to thrive in the near term. The AUD stands out as a potential outperformer, supported by factors such as US protectionism not posing an immediate threat and Beijing’s stimulus efforts benefiting China proxies. As the market adjusts post-election, it will be interesting to see how these dynamics play out in the coming months.
