With Trump's victory in the first round of the US presidential debate and high interest rates continuing to support the US dollar, a strong US dollar seems to be a major concern for many monetary policy makers worldwide as they enter the second half of the year.
Although the leading advantage of the far right seems to be lower than market expectations due to the first round of voting in the French National Assembly elections, causing the US dollar index to decline during the Asian session on Monday, the Bloomberg US dollar index had risen for six consecutive weeks, marking the longest rise since February. Meanwhile, after Trump became the winner in the first round of the US presidential debate, the dollar bulls seem to have another key advantage in sight.
Antje Praefcke, Senior Foreign Exchange Analyst at Commerzbank Frankfurt, wrote, "The likelihood of Trump winning is increasing, which could potentially provide support for the US dollar in the coming weeks and months. Trump appeared even stronger in the first televised debate last Friday."
Previously, market participants generally expected that Trump's victory would be more favorable to the US dollar in their analysis of the direction of the US election. Deutsche Bank strategist Alan Ruskin stated in the first quarter of this year that "the 'Trump effect' is to some extent assumed to be positive for the US dollar because it is negative for non US currencies such as the euro and Mexican peso. Traders recognize that for different reasons, Trump's impact on trade and geopolitics will at least initially be positive for the US dollar."
Deutsche Bank strategists reiterated before last week's first debate in the US general election that the election may provide more room for the US dollar to rise. If the US adopts aggressive trade protectionism policies, they will consider revising their forecasts for the euro to dollar exchange rate to bring it closer to parity.
From the performance of the global foreign exchange market in the first half of this year, as the US dollar index continues to rise, non US currencies have felt tremendous pressure: currently, the Japanese yen has fallen to its lowest level since 1986, and the euro also hit its worst monthly performance since January last month.
A set of statistics shows that in June, almost all emerging market and developed country currencies depreciated against the US dollar.
Due to the uncertainty of when the Federal Reserve will initiate monetary easing policy, global monetary policy differences are undoubtedly still favorable for the US dollar at present. Tony Rodriguez, head of fixed income strategy at Nuveen, said that the combination of slowing economic growth and strong inflation means that the Federal Reserve will take (loose) action very slowly and patiently, which is beneficial for the strengthening of the US dollar.
Consistent with the cautious attitude of the Federal Reserve, as the second half of the year approaches, the prospect of easing monetary tightening policies seems increasingly likely to be realized in most parts of the world. Non central bank governors are increasingly concerned about the downward pressure on the economy, and global policymakers may not be too distracted by the Federal Reserve's delayed interest rate cuts, which could distract their attention from their own loose policies.
Currently in Europe, the Swiss Central Bank has already lowered interest rates twice this year, the European Central Bank has lowered rates once, and the Bank of England may also cut rates soon.
The series of risk events this Monday cannot be ignored
Of course, in the first week of the market opening in the second half of the year, it may not be easy for US dollar bulls to maintain their success in the first half of this year and further expand their returns: the series of political and macroeconomic risk events on Monday may bring more uncertainty to the stock and bond forex market.
The first round of voting in the French National Assembly elections, which just ended over the weekend, will undoubtedly bear the brunt. The euro opened high at the beginning of Asian trading on Monday as traders began to digest news that the French far right political party represented by Marina Le Pen would have an advantage in the first round of parliamentary elections, with signs that the party's lead was not as strong as some pre election polls showed.
Preliminary results show that the far right National Alliance Party leads the centrist coalition of President Emmanuel Macron and the left-wing New People's Front, but may not receive enough votes after the second round of voting to secure an absolute majority of seats. At present, the focus of the market has shifted to whether the party can gain sufficient support in the second round of voting on July 7th, thus occupying an absolute majority in the National Assembly. Macron and other opponents of the National League are already devising strategies to exclude this far right political party from the center of power.
In addition to France, the UK will also welcome an election this Thursday. The election results may be announced early on Friday, and the opposition Labour Party is expected to easily win a majority of seats. In view of the fact that the election results do not appear to be too uncertain, and the Labour Party has no plans for large-scale government spending, the impact on the British pound, British treasury bond bonds and the British stock market may be slightly positive, but the impact is limited.
Investec economist Lottie Gosling said in a report, "Although Labour's approval rating has declined over the past five weeks, its advantage over the Conservative Party has been maintained. In the few days remaining in the election, apart from Labour's huge victory on July 4th, there should be no surprises, so it is expected that the UK financial market will not experience too much volatility during the election period."
At the central bank and macroeconomic levels, risk events will also gather this week.
The European Central Bank will hold its annual seminar in Sintra, Portugal from July 1st to 3rd, which has long been regarded by the industry as the "Global Central Bank Conference" hosted by the European Central Bank, alongside the Jackson Hole Conference hosted by the Federal Reserve. The keynote speakers attending the annual meeting include Federal Reserve Chairman Powell and European Central Bank President Lagarde, who may reveal some of the latest clues on monetary policy.
In the view of analysts at Morgan Asset Management, as long as the Federal Reserve maintains borrowing costs at a relatively high level compared to other central banks, the US dollar will continue to benefit. However, they also warn that this support may gradually weaken at some point.
According to a research report by CITIC Securities, the Federal Reserve is currently maintaining a neutral stance as a whole, and it is expected that Powell will "trade time for space" and wait for more good inflation data to curb US demand and inflation.
In addition, this Friday, the regular release of US non farm payroll data at the beginning of each month will once again meet with investors. At present, the industry expects that the report will show that the US economy added 188000 non farm jobs last month, and the unemployment rate will remain stable at 4%.
Previously, the unexpected increase of 272000 new non farm payroll jobs in the United States in May caused a short-term sharp decline in the US bond market. However, recent sets of US economic data have actually shown signs of weakness. The positive trend of inflation, coupled with signs of slowing economic activity, has led many economists to believe that the Federal Reserve should be inclined to lower interest rates as early as possible.
Michael Pierce, Deputy Chief US Economist at Oxford Institute of Economics, wrote in a report to clients over the weekend, "The recent signs of weakness in the labor market indicate that Federal Reserve officials also need to pay attention to the risks of full employment within their scope of responsibility."