BESSENT BOUNCE

Scott Bessent's nomination as the US Treasury head under President-elect Donald Trump looks set to take some of the steam out of the surging dollar on Monday. On this typical low liquidity period, the dollar displayed a sweeping retreat across all Group-of-10 currencies, with the euro, pound, and Aussie posting significant rallies against the greenback.

One would anticipate a modest uplift in local Asian currencies today as markets engage in some long dollar covering, spurred by speculations that Trump’s tariff policies might be introduced more gradually under a Bessent watch. And given Trump's reputation as a dealmaker, it’s plausible to assume that tariff implementation could involve strategic negotiations. With Bessent now poised to fill the Treasury role, there is an expectation that bond markets and corporates might wield more influence over the incoming administration. Bessent's background as a savvy trader could lend a more nuanced approach to fiscal policy.

Caution is paramount when navigating market movements like those seen at the Wellington open, where spreads are notably wide. These early responses can be misleading, often missing the subtleties of potential policy shifts under the new administration. After all, we're not privy to the confidential discussions happening at Mar-a-Lago.

Forex speculators noting a potential long dollar squeeze might expect that both London and New York markets will exploit this trend, making it quite plausible for the market to embrace reversion momentum today. However, the entrenched medium-term dollar trend, with USDJPY as a short-term anomaly, seems difficult to disrupt in my view. Despite this, I'll revisit and expand on these dynamics in my FX commentary later today.

Bessent is a legendary figure in FX circles, famously known as one of George Soros's key lieutenants during the seismic 1992 trade that shook the foundations of the British economy. The audacious short bet against the British pound culminated in the tumultuous "Black Wednesday," a day that etched itself into financial lore when the pound staggered under pressure and was forced to break away from the European Exchange Rate Mechanism (ERM). This bold maneuver not only threw the Bank of England—affectionately termed the "Old Lady"—into disarray but also netted Soros and his team an astounding profit exceeding $1 billion, marking a defining moment in currency trading history.

ASIA OPEN

As we head into the final trading week of November, investors across Asia are hoping for a turnaround after a series of challenging weeks. With the dollar softening and US 10-year yields edging lower, today's 'Bessent bounce' might just offer a glimpse of hope. This slight market lift could help investors see through the dense economic gloom, persistently blocking any signs of recovery.

Despite what could be little more than a fleeting dose of optimism this morning, keeping the broader, prevailing economic context in focus is imperative. The United States is carving a distinct path in the global economy, underscored by a robust U.S. dollar, buoyant Wall Street, and escalating Treasury yields—a divergence that has sharpened recently. The dollar index has soared to its highest since the intense energy price shocks of autumn 2022. Growing concerns about global economic stability and the looming threat of a new trade war under the guidance of President-elect Donald Trump fuel this surge. Additionally, rising geopolitical tensions between Russia and the West have further boosted the USD's status as a safe haven, highlighting the intricate and complex dynamics shaping the global economic landscape.

Sentiment towards Emerging Markets (EM) assets is notably weak. The MSCI Emerging Market and Asia ex-Japan indexes have dropped in five of the last seven weeks. Under typical circumstances, these levels might tempt investors to "buy the dip," but the current global backdrop makes such moves less appealing. Trump's return to office has reignited fears of a severe trade conflict that could dwarf his earlier tenure's disputes. His proposed tariffs—ranging from a 10% to 20% increase on all imports, with even monumentally higher tariffs targeted at Mexico and China—could escalate to levels not seen since the Great Depression if his demands are unmet.

In the US, the combination of looming widespread tariffs and Trump's ambitious plans to slash taxes and reduce America's low-wage labour force is brewing a storm of inflationary pressures, casting doubts on the likelihood of an easy economic descent.

In the realm of whimsical Wall Street, while stock markets may occasionally soar on the wings of political euphoria, the bond market remains a realm governed by hard facts and continues to exhibit signs of distress. Bond traders are particularly perturbed by the Federal Reserve's approach to stoke the economy with rate cuts amidst an overheated economic climate. This approach seems to clash with the goals of taming inflation or even keeping it in check. The upcoming release of the October Personal Consumption Expenditures Index (PCE) is eagerly anticipated. It will shed light on the current trajectory of U.S. inflation ( using the Fed’s preferred guide) and could play a pivotal role in shaping the Fed's decisions come December.

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