Betting markets still favor Joe Biden despite debate performance issues

Can Trump boost the USD with his policies

by Faruk Imamovic
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Betting markets still favor Joe Biden despite debate performance issues
© Getty Images/Scott Olson

Can Trump Help the USD Stay Strong?

  • • So long as Donald Trump is seen to be the favorite to become US president, it could put renewed upward pressure on the USD. That's on the premise that Trump's tariff and fiscal policies would be indirectly supportive of the USD, through their effect on trade flows, tariff-driven inflation, and the Fed's "hawkish" response to that inflation.
  • • Mexico's Banxico invoked FX volatility in its Statement yesterday to suggest that the weaker MXN was a reason behind its decision to leave the policy rate unchanged at 11.00%. Keeping the policy rate high at least until after the Congressional session of late summer should help USD/MXN drift back toward 17.50 this year.

Discussion

Following a presidential debate that was anything but lively last night in the US, attention will turn imminently to the US's PCE price index inflation this morning. As a measure of inflation that arrives 'late' relative to the CPI, and which is largely informed by the previously-released CPI and PPI reports for the reference month (May), it has less scope to produce a surprise. The consensus already subsumes the benefit of the low-side CPI and PPI results from May to project a 0.1% month-over-month gain for the PCE PI, and a decline to 2.6% year-over-year core PCE inflation (from 2.8%).

And yet, despite the decline in inflation seen in May, Federal Reserve officials continue to lean hawkish in their tone. Tom Barkin was the latest of these Fed officials to sound hawkish in a speech he gave in Paris recently. He invoked the US economy's resiliency and said that he is open to the idea that the long-run policy interest rate that will keep supply and demand in balance "has shifted up somewhat", meaning that current policy may not be as restrictive as perceived. This hasn't moved the USD OIS forward curve much, however.

The forward rate curve continues to sit squarely between the prospect of one and two rate cuts happening this year, despite the Fed's attempts to convince traders that only rate hike is coming. The willingness of the market to presume a more dovish Fed than the Fed's own median 'dot' implies is a result, we believe, of the recent softness in the US activity data.

Still, the media is more replete this morning with commentary about how poorly Joe Biden did at the US presidential debate last night, rather than with the Fed's policy outlook.

So much so, in fact, that betting markets have shifted some of the probabilistic weight toward other Democratic politicians becoming that Party's nominee, instead of Biden. And yet Biden is still the favorite to win the Democratic Party's nomination in the betting markets (60-62% according to PredictIt and Smarkets), perhaps reflecting how hard it would be to replace him if he doesn't choose to step aside voluntarily. That's because the formal nomination process for Democrats is scheduled to occur weeks before the August 19 convention (to ensure that ballot access deadlines are met) and because Biden has secured a majority of pledged delegates to the convention. Other candidates that might challenge Biden for the nomination—such as California Governor Gavin Newsom, Illinois Governor J.B. Pritzker, and Michigan Governor Gretchen Whitmer—have continued to endorse him in any case. But even if those persons run in Biden's stead, their challenge to Donald Trump isn't assured of success, since they have not polled better against Trump than Biden has in the important battleground states, at least according to the recent Bloomberg/Morning Consult polls conducted in April 2024. Name recognition and voter familiarity remain obstacles for any substitutes for Biden.

Donald Trump
Donald Trump© Getty Images/Anna Moneymaker
 

Donald Trump's chances

Of course, this doesn't assure that Trump wins the presidency, either. Trump's betting market probability went up to 58.5% from roughly 53% before debate. That doesn't make him a shoe-in, and events such as his sentencing on July 11 (for the "hush money" case) could affect his chances too. So can his choice of vice-president, presumably by the time of the Republican convention on July 15-18. Still, until that time, traders will be increasingly grappling with the effects of a Trump presidency on markets, based on his avowed policies.

One of Trump's policy pledges, of course, is to impose more tariffs on goods imported from China, and to use the revenues generated to offset and partly lower income taxes. The policy is also intended to reduce the US's trade deficit, on the presumption that this would shift jobs from the rest of the world to the US. As part of this policy Trump has proposed a 10% across-the-board tariff on all trading partners as well as 60% tariffs on imported goods from China. There is a strong case to be made that the effect of these tariffs would be to the foreign exchange value of the USD vs. its peers. That view draws on the insights from a range of macro models that show that the USD's appreciation after a general US tariff increase would be necessary to maintain equilibrium (i.e., clear the market) in global goods trade, since in the absence of a stronger USD there would be an excess supply of foreign goods (and an excess demand for US goods) because a higher US import tariff shifts US residents’ demand from imports to US-made goods. The USD would then appreciate to raise the international price of US goods, in order to encourage global consumers to shift away from US exports and toward the products of their own countries to restore the balance between supply and demand. Of course, in response to new US tariffs, foreign central banks may feel compelled to cut their interest rates to offset the temporary loss of exports to the US too, further helping the USD rally.

Could the rise in the USD dampen the upward effect of tariffs on US inflation? Probably not easily. That's because the US doesn't always enjoy the immediate disinflationary implications of a strong USD because almost all of the US's imports are already invoiced in USDs. Foreign suppliers might lower their USD prices in time, but such responses would occur slowly. So the US CPI wouldn't easily decline after a large USD appreciation because invoiced prices of imports wouldn't decline immediately. Instead, coupled with higher tariffs, a full-employment economy in the US would likely experience more inflation following a shift toward domestic purchases of US goods, and that could spur the Fed to keep its own policy rate higher than otherwise, further strengthening the USD. Other Trump policies, such as the extension of the Tax Cut and Jobs Act of 2027, would be deemed to be fiscally expansive, and thus spur inflation too, leading to a "tighter" monetary policy response as well, which would also help the USD. The Bottom Line is that so long as Trump is seen to be the favorite to win the presidential election, it could put renewed upward pressure on the USD, on the premise that Trump's policies would be indirectly supportive of the USD, through their effect on trade flows, tariff-driven inflation, and the Fed's ultimate response to the effect on inflation.

Joe Biden
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