Repricing DJT

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While the Iowa caucus can in no way be called a surprise, it seems to have dusted off memories of 2017 and cleared some of the subconscious bias.

by Brent Donnelly

January 17, 2024

Current Views

Long 19JAN24 0.6650 AUD put

for ~25bps off 0.6700 spot

Took profit.

Long EURSEK @ 11.26

Stop loss 11.1440

January 17, 2024

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Repricing DJT

This market is weird. You have an Iowa primary result that could not have possibly surprised anyone alive on Earth, and yet markets are trading like Donald Trump’s odds have jumped significantly. Oh wait, they have.

Trump odds of winning 2024 Presidential election (PredictIt)

Maybe there are enough people with a subconscious or conscious bias against Trump that they were holding out some hope for a Haley or other surge and now the cold reality has hit like Battery Park winds. Meanwhile, the US data continues to stonk and the market is positioned for disinflationary Goldilocks, not a fiscal reacceleration and inflation trade.

But also: Today is January 17. Are we trading the outcome of the November 5th election here? I understand that market prices are a series of weighted probabilities, so perhaps that makes sense. We just added 5% onto the Trump outcome and this is good for 150 points in USDJPY and 10bps in US 10-year yields. But then what?

This is a big level in yields.

US 10-year yield, hourly back to late October

This market has had no narrative other than seasonal USD selling and equity buyers in December and mean reversion in January, so there is plenty of room for whatever narrative sounds logical to hop in the driver’s seat for a bit. This one sounds pretty logical. Higher tariffs, more fiscal, more aggressively anti-China etc. Oddly, while USDMXN is kind of blowing up a bit, USDCNH is lagging. CNH has appreciated relative to its peers.

If you think this Trump trade is going to continue, buying 2-week or 1-month 25-delta USDCNH calls makes sense. I still like the USD higher, especially USDJPY, and I have taken profit on the AUD simply because it reached my target. I’m kind of agnostic on AUDUSD here given we are at huge levels and Aussie jobs comes out tonight.

I don’t have many answers today, but here’s another question: If we are trading a Trump win and repeat of 2017 fiscal or some kind of mini-repeat of 2021 and 2017 combined… Isn’t that bullish commodities and equities, too?

Performance of various things around the 2016 election

Obviously, market movements related to an event that is going to happen in 10 months are not necessarily guaranteed to persist. Nobody buying USDMXN here is holding on for the election. This is a mini positioning event and a repricing of the probability distribution for November. The thing is, I think USDJPY was probably going to do this anyway and it’s probably going to keep going to 150 as the BOJ has disappeared, NISA flows are a minor marginal factor, Nikkei is a hot destination for money fleeing China and the market has fully priced the immaculate disinflation just as shipping costs rise and housing prices will start making a positive contribution to inflation again soon (April 2023).

Final Thoughts

Retail Sales continue to show the divergence between soft and hard data. That Empire number yesterday is a great example of why nobody should be trading or forecasting with soft data anymore. It’s broken.

Have a snarky and hilarious day.