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TD Securities Global head of FX and EM strategy Mark McCormick joins Catalysts to break down the factors driving the US dollar's (DX=F) post-election rally.
McCormick believes the bullish momentum in the dollar trade is just getting started. "There's a fundamental story here," he explains. "US asset markets, US equities, [and] the terminal rates have already been repriced higher. All of these things have legs and now have a continuation."
With uncertainty lingering around other global currencies, McCormick sees the clearest trade opportunity as "buying into US exceptionalism with a much stronger US dollar coming through the first part of next year."
Watch the video above to hear McComick's views on the European, German, Mexican, and Asian currencies against the US dollar.
To watch more expert insights and analysis on the latest market action, check out more Catalysts here.
This post was written by Angel Smith
Joining us now for what's next in the currency market, we want to bring in Mark McCormick. He's Global Head of FX and Emerging Markets strategy at TD Securities. Mark, it's it's great to have you here. So first, just your reaction. We did see a little bit of stalling here in the dollar move to the upside this morning, but still a significant climb.
Yeah, this follows pretty much every red wave playbook. Um, if you think about the the context of this, there's US steepeners, there's a repricing the Fed, the US is going to have a higher terminal rate than the market saw a few months ago, and this is a broad strength for the dollar. Uh, that reflects the macroeconomic policy changes we could have. It also reflects the fact that there's a lot of scope now. If uh, Trump can get the house as well, that we have deregulation, we have tax policy, we have fiscal policy, we have immigration, and we have trade. Uh, so the markets got to adjust to reflect that.
How much conviction, Mark, is there behind this dollar trade that we're seeing?
I think we're just starting to see it. Uh, I would say we've been bullish the dollar for the past couple of months. Uh, part of it was the uncertainty around the election that the markets just in itself was not trading this event. Um, again, it was a binary event with huge tail risks. Now we're starting to see what those tail risks look like. I think if you kind of kind of take away the event risk that we had and where we're going with the election versus where how we got here, the US data has been outperforming the rest of the world basically since summer. So if you kind of think about the strength of data and a data independent world, US data is doing stronger and better than what we've seen out of the Euro zone and China. So there's a fundamental story here. The US asset markets, US equities, um, again, the terminal rates are already been repriced higher. All these things have legs and now have a continuation, um, that's going to move into a an environment where now we have political uncertainty in Germany. We know that China's going to deliver stimulus, but now it's going to be on the defense. Um, so now it's like the clearest momentum trade is to just buy into US exceptionalism with a much stronger US dollar coming through the first part of next year.
As Mark, how strong of a dollar are we going to see?
I I'd say we lay this out in our pre-election notes, um, in terms of scenarios with this red wave. Euro can get to parity. Uh, that's a that's an easy target. I don't think it's out of the round possibility. Dollar China's probably absolutely going to revisit the 730 levels. Uh, I think the one that's going to be kind of interesting to watch will be dollar yen. I think this all but assures that the BOJ's going to hike in December, largely again as a way to preserve the yen. And also one of the things that came out of the recent Japanese elections is really it's been the cost of living shock. A lot of people thought it was an LDP scandal, but essentially a weak yen, really low real incomes, and real low interest rates has been fueling, um, essentially, you know, uh, disapproval ratings in Japan. So the other currency you want to keep on your radar screen is Mexican peso.
Well, let's go exactly there, Mark, because one of the questions I had for you, right, was going to be what are you more concerned about? A trade war with Europe or a trade war with Mexico?
I would say from Europe's standpoint, the trade war is just the it's absolutely the worst time. Again, if you think about what's happening in Europe, they don't have the fiscal ammunition to grow the economy. France is moving in one direction, Germany's moving in another direction. There's going to be snap elections most likely in Germany next year. And there's no fiscal architecture to pull the whole thing together to grow Europe and to fight against, you know, the relative strength of the US economy or the rate differentials that are coming as a result of of monetary policy divergence. In Asia, I think things are a little bit different because most countries in Asia have savings. It's just that they've exported those savings for the last five to 10 years. I do think there's room here that we could see Asian currencies actually start to outperform at some point, and there is room that at some point maybe China and the US come to a deal. Stronger, uh, essentially remedy for a weaker dollar. Maybe you see some industrialization and some manufacturing plans coming from China into the US. But I think the biggest thing you want to watch on trade is Mexico. Mexico really is um in in a tough position right now because number one, there's a sunset clause in the USMCA deal that kicks in in 2026. Uh so the US can basically say to Mexico, hey, we want you to reduce your trade relationships with China, which has been a big part of the Mexican economy recently. The other thing they could do is if the US does decide to strike a deal with China and bring China into the US supply chain, try to reindustrialize the Rust Belt, Mexico is the biggest loser because Mexico is then kind of cut out of the US supply chain or the North American supply chain. So I think if you think about all the risks here, especially with the stronger dollar, Fed repricing, steeper US curve, the Mexican peso is also going to get hit as a carry trade. So you've got uh geopolitical risks, trade risks, and even kind of market risks that all all pointing in the wrong direction for the peso.