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US Dollar Cruising Higher on Inflation Expectations

Published November 10, 2016
  • USDCAD is threatening a move back above 1.3500 this morning as rising inflation expectations in the US following Trump's victory give the greenback a boost
  • Greater fiscal spending under a Trump presidency has resulted in large losses in the bond markets as US 2 and 10 year yields have soared the most in over three years (Chart 2)
  • Meanwhile, US equity markets have rallied as they discount future cash flows due to rising inflation expectations
  • Tax cuts, massive infrastructure spending, and attacks on trade deals – that’s the essence of what a Trump administration looks like and so far it’s working in favour of the US dollar
  • The extent of Trump's disdain for the current parameters of trade deals such as NAFTA was made clear during the election and this is being reflected in the USDMXN and USDCAD rates as both the peso and the Loonie remain under pressure
  • Whether Trump can impose his will and alter the nature of trade agreements remains to be seen, but with a Republican controlled Congress, the possibility of him acting unilaterally is certainly higher than it otherwise would be; however, to get something through the Senate he will need 9 democratic votes otherwise the filibuster will likely lead to a congressional stalemate
  • The bond market is raising red flags and waving furiously as the potential for tectonic shifts across market prices in the medium term becomes a real possibility
  • Volatility is high and the underlying tone that continues to build is a rotation out of bonds and into equities; traders anticipate higher inflation and a higher rate structure in the US which spells good news for the US dollar

Charts: (1) USDCAD (2) US 10-yr yields spike higher (3) Economic Calendar