The US dollar is bouncing back after last week’s tumble, and there's a clear reason: President Trump's re-election odds are climbing. Don't say we didn't give you a heads-up!

Markets are increasingly betting on a Trump Presidency and a Republican sweep. The buzz is all about the positive growth from deregulation and fiscal stimulus, with less worry about significant tariffs. However, you can sense that it's only a matter of time before Asian forex faces a reality check and braces for Trump to double down on tariffs.

The burning question in FX markets today is what to do with USD/JPY. Lately, USD/JPY has been increasingly detached from yield spreads, and short yen positions by leveraged funds have soared to their highest levels since 2017. Indeed, it's particularly tough to dislodge carry trades when yield shifts do little to affect underlying momentum. The last time 10-year US yields were this low, back in April, USD/JPY was trading at 150, but now UST vs. JGB yields are narrower and the pair is trading within a stones throw of intervention territory (160)

The US rate market is now fully pricing in a rate cut fiesta, expecting a 25bps cut by September and even a small chance of a larger 50bps cut. For the year, the market has priced in a total of 75bps in Fed rate cuts, with almost 150bps anticipated by mid-next year. This should be negative for USDJPY, maybe today’s US retail data could hit the pairs r if US consumer health continues to soften—but I’m not holding my breath unless retail sales is a disaster and triggers risk off then perhaps yen could see some positive action. Overall I don’t think it’s a major risk to go short USDJPY into retail sales.

Fed Chair Powell, in his recent interview, kept his cards close to his chest regarding the timing of rate cuts and did not provide a strong signal over the likely timing of the Fed’s first rate cut.He did however mention that the latest three inflation readings "somewhat" boost confidence in rate cuts, with risks to employment and inflation goals now more balanced. While his comments were interpreted as stock market friendly , FX traders are on the Trump victory bandwagon and holding on to those dollars.

Asia FX markets are mixed bag , offering little guidance despite a gloomy outlook for China, which suggests a much stronger US dollar. Overall, the big picture is that the Chinese economy still needs more stimulus and, more importantly, meaningful long-term reforms to improve market sentiment.

The main catalyst for improving conditions for carry trades this summer appears to be growing expectations that the Fed will start cutting rates in response to slowing US inflation. This has helped dampen financial market volatility and encouraged risk-seeking behavior among market participants. Thus, Fed cuts seem to be a double-edged sword for the Yen. On one hand, they should dampen demand for USDJPY, but on the other, they encourage carry trade trades that can pressure the Yen as a funding currency.

With all these factors in play, traders are left pondering their next moves in a market that seems more like a suspense thriller than a predictable drama.

The rising likelihood of Donald Trump returning to the White House poses significant downside risks for Asian currencies in the year ahead. The most direct impact on Asia FX will come through trade policies. As the largest source of the US trade deficit, China will be the top target for the most severe trade measures. Remember, there's a tight "follow me, I'll follow you" correlation between CNH and JPY, so turbulence for the yuan likely means trouble for the yen too.

Euro, despite the steepening of the UST curve following an assassination attempt on Trump (deemed to potentially increase his re-election chances), remains somewhat resilient. The European Central Bank's rate-cutting narrative hasn't built up as strongly as the Fed's, resulting in the tightest 2Y USD-EUR spread since January—a point we've emphasized for weeks. This has kept the EURUSD relatively steady amid the Trump trade, but for how long? The looming political risk of uncertainty over the next government in France casts a shadow. Different political risks on both sides of the Atlantic are likely keeping traders from fully engaging in long EURUSD positions.

The spillover effects of a Trump presidency on EUR rates are complex. On one hand, rising UST yields tend to push rates up elsewhere. On the other, a protectionist agenda could dampen the eurozone's growth outlook, creating a muddy scenario.

Although I much prefer playing the role of the crazy reversion trader in FX, when I’m now however I much prefer to take the easy road like long gold which is the ideal hedge for a republican sweep.

Joining Goldman Sachs, our base case for gold is $2,700 by year-end, driven by solid demand from EM monetary sovereigns and households in Asia. Additionally, their in-house commodity economists flagged an extra 15% upside in the event of new financial sanctions and similar potential in the context of rising concerns about US debt. This makes gold a compelling investment as we navigate the uncertain political and economic landscape ahead.

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