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USD: USD Risk Reversals Firm With Trump Election Odds, Other Factors Supportive

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A proxy for the USD risk reversal (the BBDXY index, see .BBDXYR1M on BBG) sits close to multi month highs. The chart below plots this proxy against the Trump election odds (per PredictIt).  The move up in the USD risk reversal is in line with Trump election odds also moving to multi month highs. Trump is seen as supporting the USD via higher tariffs, but also reflationary policies, which could drive US yields/rates higher, all else equal. 

  • This is not the only driver of USD gains though, with US data momentum outperforming the major economies in recent weeks. The Citi EASI sits at +14.8, fresh highs back to late April of this year. The Atlanta Fed GDP nowcaster is at +3.43%, also fresh multi month highs.
  • Some developments outside of the US have also turned more supportive for the dollar. The second chart below plots spot EUR/USD against the real yield differentials (proxied by the German - US real 10yr differential).
  • Until we start to see this differential turn higher we may see EUR remain under pressure, which will have broader implications for dollar sentiment.
  • As we noted earlier the CFTC positioning update from the end of last week showed a large shift in favor of the USD, so we may see more two-way price action in the lead up to the US election. 

Fig 1: USD Risk Reversals (proxy via BBDXY series) & Trump Election odds. 

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A proxy for the USD risk reversal (the BBDXY index, see .BBDXYR1M on BBG) sits close to multi month highs. The chart below plots this proxy against the Trump election odds (per PredictIt).  The move up in the USD risk reversal is in line with Trump election odds also moving to multi month highs. Trump is seen as supporting the USD via higher tariffs, but also reflationary policies, which could drive US yields/rates higher, all else equal. 

  • This is not the only driver of USD gains though, with US data momentum outperforming the major economies in recent weeks. The Citi EASI sits at +14.8, fresh highs back to late April of this year. The Atlanta Fed GDP nowcaster is at +3.43%, also fresh multi month highs.
  • Some developments outside of the US have also turned more supportive for the dollar. The second chart below plots spot EUR/USD against the real yield differentials (proxied by the German - US real 10yr differential).
  • Until we start to see this differential turn higher we may see EUR remain under pressure, which will have broader implications for dollar sentiment.
  • As we noted earlier the CFTC positioning update from the end of last week showed a large shift in favor of the USD, so we may see more two-way price action in the lead up to the US election. 

Fig 1: USD Risk Reversals (proxy via BBDXY series) & Trump Election odds. 

Keep reading...Show less