The Fed's mouth, a ghost that "deceives"
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The Fed's mouth, a ghost that "deceives"
As the November U.S. election approaches, trading themes will gradually shift toward the election.
Navigating Web3 tides with focused insightsAuthor: Chen Min
Market shifts are always sudden and hard to comprehend.
Just like your cautious self, your skeptical self, your confused self—just as you begin to believe the Fed’s explanation for “why it should cut by 50 bps,” you suddenly have to make sense of why the Fed now says “it can’t cut by 50 bps.”
The Fed's words truly feel like deceptive tricks.
Almost overnight, the Federal Reserve’s tone has shifted entirely to “caution,” “balance,” and “data-dependent.”
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New York Fed President Williams: Two additional 25-basis-point rate cuts this year represent a very good baseline scenario.
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Atlanta Fed President Bostic: The Fed must balance competing risks when considering the pace of further rate cuts in the coming months.
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Boston Fed President Collins: Policymakers should take a cautious, data-dependent approach when lowering interest rates to help sustain strong momentum in the U.S. economy.
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Fed Vice Chair Jefferson: Risks to the Fed’s employment and inflation goals are now roughly balanced.
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Fed Governor Kugler: The Fed should remain committed to bringing inflation down to its 2% target, but adopt a “balanced approach” to avoid an “undesirable slowdown” in job growth and economic expansion.
In my view, this shift is due to the following reasons:
First, recent nonfarm payrolls significantly exceeded market expectations. September saw 254,000 new jobs—the strongest monthly gain in six months—69.3% higher than the expected 150,000 increase.
Second, with the U.S. election drawing closer and intensifying, the two candidates are neck-and-neck in polls. Any Fed action could be interpreted as political favoritism, so the central bank prefers to stay “steady” and “cautious” before the election.
Third, the Israel-Hamas conflict has escalated again. If the situation worsens, it could trigger a spike in oil prices, a rebound in inflation, and broader price pressures—factors the Fed must now consider.
Fourth, after the first rate cut, emerging market assets—particularly A-shares and Hong Kong stocks—became much more attractive, accelerating capital outflows from the dollar. This gives the Fed greater incentive to slow down its actions ahead of the election.
Market pricing for Fed rate cuts has now reverted to expectations of one cut each in November and December.
Figure 1 Fed Rate Cut Expectations
As expectations for dollar rate cuts adjust, the U.S. Dollar Index formed a “V-shaped” rebound in early October. This reflects not only dollar-specific factors but also the relative weakness of other major currencies such as the euro and yen.
Figure 2 V-Shaped Reversal in the U.S. Dollar Index
1. On the euro front, the European Central Bank (ECB) remains persistently dovish.
After the German central bank chief signaled support for a rate cut in October, French central bank governor Villeroy said the ECB is likely to cut rates next week and will continue easing policy at future meetings. The euro’s movement closely tracks the U.S.-Europe interest rate differential, reflecting the direct impact of rate pricing on exchange rates.
2. Regarding the yen, the risk of a hawkish turn under Japan’s new prime minister is gradually dissipating.
Japan’s newly appointed Prime Minister Shigeru Ishiba conveyed a dovish message in his first press conference, signaling continuity in monetary policy—contributing significantly to the yen’s renewed weakness. Former BOJ board member Maeda now expects the BOJ’s next rate hike most likely in January next year, a substantial delay from earlier expectations of year-end.
3. Benefiting from the appeal of RMB-denominated assets, the Chinese yuan remains relatively strong among major currencies despite some depreciation.
Figure 3 CFETS RMB Index
Looking ahead, I believe that as the U.S. election in November approaches, market themes will gradually pivot toward election-related trades.
According to the latest polls, Trump’s national approval rating has drawn close to Harris again, maintaining a lead in several swing states.
If “Trump trade” becomes dominant, the U.S. dollar may show strength.
Figure 4 Polling Comparison Between Trump and Harris Nationally and in Swing States
However, from a medium- to long-term perspective, I remain optimistic about non-U.S. currencies.
First, RMB-denominated assets continue to hold strong appeal. Despite some pullback, market expectations for further policy support remain.
Markets may progressively advance through stages of trading on policy sentiment, policy implementation, and finally, policy effectiveness.
Second, I believe the pace of U.S. rate cuts may slow—but won’t stop. As the U.S. interest rate advantage narrows, capital flows into emerging markets will accelerate.
Looking forward, China remains promising.
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