Synopsis:

Morgan Stanley anticipates that the US Treasury yield curve may steepen and the USD's reaction to the election outcome will be influenced by potential changes in trade policies and geopolitical uncertainties.

Key Points:

• Yield Curve Steepening: Expectations for lower yields on short-term bonds, driven by anticipated Fed rate cuts and easing inflation, support a steeper yield curve. A Republican win could exacerbate this trend with potential higher tariffs.
• USD Reactions: Contrary to assumptions, a Trump victory might not weaken the USD. Historical trends show the DXY rose after Trump's 2016 win. Potential for new tariffs could drive further dollar strength by impacting global growth and prompting safe-haven flows.
• Democratic Victory Impact: If Democrats retain the White House, the USD might face headwinds due to reduced uncertainty over trade policies and less safe-haven demand.

Conclusion:

The US elections could influence both Treasury yields and the USD, with a potential steepening of the yield curve and a nuanced response from the dollar depending on the election outcome and associated trade and geopolitical developments.