The US Treasury selloff is adding fuel to the dollar rally. Our perception is that the size of the bond and FX moves are now being exacerbated by some deleveraging ahead of the US election.
USD is Strengthening its position
The path should be a stronger dollar if FX liquidity conditions indeed worsen into 5 November, and we could see the Norwegian krone emerging as a big underperformer due to its low liquidity character. We still expect some additional pressure on AUD and NZD as market hedges for a Trump re-election can hit China proxies.
Yesterday, three Fed speakers (Logan, Kashkari and Schmid) sounded quite cautious about future easing, effectively endorsing the recent hawkish repricing in the USD OIS curve. Mary Daly was more dovish, but that did not prevent markets from trimming another 5bp from year-end rate expectations. The Fed Funds futures curve currently embeds 40bp of cuts and the OIS curve 36bp.
Possible market reaction
"While that has continued to widen to policy divergence in favour of the dollar, we are not sure markets will be willing to price out much more easing without having first received some further information on the jobs market, ING's Francesco Pesole said.
"In that sense, we may need to wait another week (JOLTS job opening figures on 29 October) for the next key input to the macro story. Until then, our bias for a stronger dollar is more a result of potential Trump hedges rather than further near-term swap rate widening."
