Former President Donald Trump’s election prospects are already impacting the markets.
According to a recent note from investment bank Macquarie, the so-called Trump trades, a series of investments that were supposed to pay off in the event of his re-election, have begun to unravel.
One of the most high-profile of these transactions was a bet on a stronger US dollar. But since Wednesday, the dollar’s DX-Y index (which measures the dollar against a basket of other currencies) has been oscillating just around its 2024 low. It has fallen by just under 3% so far in August.
As Vice President Kamala Harris’ victory now appears more likely, the dollar could weaken further, Macquarie said.
“We believe the weakness is partly due to the unwinding of the ‘Trump trade’, which was based on the premise of higher inflation and higher interest rates in the US, which would support the USD,” said Thierry Wizman, global FX and interest rate strategist at Macquarie Assets.
Macquarie was already convinced that the dollar was weaker than it should be. While there were positive indicators for the dollar, including a series of declines in Asian stock markets and interest rate cuts by the UK and Eurozone central banks, none of this increased the dollar’s relative value.
“The weakening of the US dollar since early August is somewhat odd in our view, as it came at a time when US data (retail sales, initial claims, ISM services index) pointed to renewed relative strength in the US after concerns about a slide into recession in late July and early August,” Wizman wrote.
“Kamala-mentum”
The explanation, Wizman and his team concluded, was that investors had decided to back away from the “Trump trades” because they thought the candidate who would make them possible couldn’t win. Wizman points out that many of the Trump trades were reversed in the week immediately following President Joe Biden’s announcement that he would not seek the Democratic Party nomination. A few weeks later, in early August, when the first polls came out showing Harris overtaking Trump, the DXY tanked. This, according to Wizman, was further circumstantial evidence that the Trump trades were indeed being reversed.
The momentum of the Harris campaign, which Macquarie called “Kamala-mentum,” would continue the weakening of the U.S. dollar while the Fed cuts rates, Macquarie says. With the Democratic National Convention in full swing, a post-convention boost in Harris’ poll numbers could actually accelerate the dollar’s fall, Macquarie says.
The retreat from the Trump trade seems to indicate that at least some investors are losing faith in Trump’s chances in November. But with several months to go until the election, no outcome is a foregone conclusion. Especially in a race like this year’s, which has only recently been turned on its head, said Frank Kelly, senior political strategist at investment firm DWS. “July was Trump’s month, August was Harris’ month and September is going to be a real brawl,” he said.
Uncertainty, more than anything else, is the reason for the retreat from Trump trades. Recent polls show the two candidates separated by just one or two percentage points. Before Harris’ recent lead in some polls, Trump was well ahead of Biden and seemed headed for a sure win. With no sure bet anymore, investors adjusted.
A Trump victory could force the Fed to support the dollar
Until now, investors had associated Trump with a stronger dollar because they believed his priorities – blanket tariffs, drastic immigration restrictions and tax cuts – would generally lead to inflation, which in turn would force the Fed to keep interest rates higher – which in turn would increase the relative value of the dollar in international foreign exchange markets.
“In our view, Trump is – fundamentally – seen as better when the dollar is stronger than a Democratic administration would be,” Wizman wrote. “This is because Trump’s core policies – tax cuts, immigration restrictions, tariffs – are seen as more inflationary and therefore keep interest rates higher than usual.”
Ironically, Trump himself is not a proponent of a strong dollar. In the past, he has argued that the dollar is too strong, making American goods too expensive for foreign buyers. “We have a big currency problem,” Trump told Bloomberg in July.
“Now they are starting to bombard each other with political issues”
Nevertheless, the majority of investors and economists expect Trump’s policies to have the opposite effect. “The market’s perception – and ours – is that Trump’s policies should be accompanied by higher interest rates than Harris’s,” Wizman wrote in his note.
In the early days of her campaign, Harris was relatively vague on policy issues, but last week she began to provide more details. Her economic views so far include supporting regulations to prevent excessive price increases on consumer goods, building more housing and eliminating taxes on tips (an idea first floated by Trump).
The Harris team has indicated that more policy details will be revealed in the coming weeks. The ongoing Democratic convention could serve as a jumping-off point for a broader political strategy. Kelly, the political strategist, believes the campaign will enter its next phase once that happens. “Now they’ll start bombarding each other with policy issues instead of getting personal,” he said.
