The dollar is trading near a two-month high after Donald Trump doubled down on his trade threats in a widely-watched interview with Bloomberg News. “To me, the most beautiful word in the dictionary is ‘tariff’,” he said, telling interviewer John Micklethwait – formerly editor-in-chief of The Economist – “It must be hard for you to spend 25 years talking about tariffs as being negative and then have somebody explain to you that you’re totally wrong.”
The Mexican peso dropped sharply as Trump attacked the friend-shoring investment narrative, suggesting that Chinese manufacturers were trying to navigate around US trade protections by locating final assembly plants on the other side of the Rio Grande. “Mexico is a tremendous challenge for us right now,” he said. “Tremendous. China is building massive auto plants in Mexico right now, and they’re going to build them, and they’re going to take those cars and sell them into the United States. They’re very near the border, and they’re going to have all the advantages and none of the disadvantages. And that’s going to be the end of Michigan. It’s going to be the end of … frankly … South Carolina, going to be the end of everything”. “If I run this country, if I’m going to be president of this country, I’m going to put a one hundred, two hundred, two thousand percent tariff,” he said, “they won’t sell one car into the United States”.
We suspect that the impact of friend-shoring flows has been exaggerated. According to Bloomberg’s fact-checkers there are no significant Chinese auto manufacturing facilities currently under construction in Mexico, and our own analysis shows that new direct investment into the country has been falling for the better part of two years as the political environment has turned more difficult and a lack of infrastructure has limited new projects.
This doesn’t negate the threat of new tariffs however, and it is likely that the risk discount embedded in the peso will remain significant until well after the US presidential election has been concluded. Policymakers on both sides of the aisle have expressed concern about transshipment of Chinese goods through Mexico, suggesting that some corrective action will be taken under any likely Congressional realignment.
Trump appeared to soften his stance on interfering with the Federal Reserve’s decision-making process, saying “I think I have the right to say I think you should go up or down a little bit. I don’t think I should be allowed to order it, but I think I have the right to put in comments as to whether or not the interest rates should go up or down”. He avoided directly addressing whether he would seek to appoint someone else to head the central bank when Jerome Powell’s term is up in 2026, but ridiculed the role itself, saying “It’s the greatest job in government. You show up to the office once a month and you say, ‘let’s say flip a coin’ and everybody talks about you like you’re a God*”.
On the dollar, the former president’s comments remained difficult to reconcile. He suggested that the US could achieve “third world status” if the greenback lost its dominance, saying “If I’m elected, the dollar is so secure. Your reserve currency is the strongest it’ll ever be,” even as he maintained a focus on the country’s trade imbalances, which are heavily driven by the level of the greenback itself.
Although polls continue to show Harris ahead by a narrow margin, Trump is currently the front-runner in prediction markets, having opened up a wide lead in the first two weeks of October. On a surface level, the dollar seems to be following betting spreads between the two rivals.
But correlation isn’t causation. The number of movies Nicolas Cage appears in each year looks correlated with the number of people who drown by falling into swimming pools, but the number of people who drown themselves after watching a Nicolas Cage movie probably** isn’t very high. A number of other dynamics are impacting currency markets, including changes in economic conditions, shifts in monetary policy expectations, and realignments in global liquidity flows. It’s simply impossible to determine the extent to which the “Trump trade” has been priced into exchange rates, meaning that the potential for extreme volatility remains high around the election itself.
Tomorrow’s data releases – retail sales, industrial production, and weekly jobless claims – could help further calibrate expectations for the Fed’s final two meetings this year, but markets seem increasingly convinced that policymakers are leaning toward two normal-sized rate cuts. Futures prices are showing just 47 basis points in easing priced in before year end, down by almost a third since the central bank’s September meeting.
In contrast, odds on an outsized rate cut at next week’s Bank of Canada meeting are holding near 80 percent this morning, reflecting September’s surprise drop in headline inflation. Data released yesterday showed growth in the country’s all-items consumer price index slipping to 1.6 percent in the year to September as gasoline prices fell and shelter costs decelerated. We still don’t think the data justify an extreme easing trajectory, but central bankers are widely expected to issue a more downbeat set of growth, employment, and inflation forecasts in the Monetary Policy Report accompanying their decision – helping justify a bigger-than-normal move – and gross domestic product data out at the end of next week is likely to help provide ratification, with the economy slowing at a more aggressive pace than the Bank had expected earlier in the year.
The loonie is languishing near a two-month low, suffering something of a perfect storm as softening inflation, rising unemployment, and still-rising debt service costs intersect with a drop in crude oil prices to sap investment demand. Looking beyond the monetary policy gap between the Fed and Bank of Canada, it remains difficult to make a bullish case for the currency ahead of November’s US election – Canada’s exposure to trade frictions represents a major Achilles heel, and will force investors to maintain hedges against downside risk for a while yet.
The British pound is reversing lower as evidence of a sustained easing in inflation pressures bolsters bets on a November rate cut. According to this morning’s release, the Office for National Statistics’ all-items consumer price index rose just 1.7 percent in the year to September, down from 2.2 percent in August as airfares and gas (more accurately, petrol) prices fell on a month-over-month basis. Core inflation – which in the UK excludes energy, food, alcohol and tobacco – slowed to 3.2 percent from 3.6 percent in the prior month, and services slid to 4.9 percent from 5.6 percent. Data released yesterday showed the number of job vacancies tumbling and wage growth settling near a two-year low in the three months to August.
Traders are now putting 100 percent odds on a move next month, with the likelihood of two cuts by year end holding near the 80-percent level. Finance Minister Rachel Reeves’ first budget, set for release in two weeks, is expected to involve a £40-billion increase in spending and taxes, but markets will be focused on growth and inflation implications that could impact the central bank’s policy trajectory.
*Fact check: the part about achieving God-like status is true.
**Some of them are, admittedly, very, very bad.