FX Talking: Groundhog Day for the dollar?
The US swing state of Pennsylvania is known not only for delivering the key votes for the next president of the US but also for giving us Groundhog Day. The question is whether Donald Trump wins and whether his turbocharging of the US economy at the rest of the world’s expense delivers a repeat of the 2018-19 dollar rally.
Were it not for the US election, investors would be left to focus on the two key themes of the likelihood of a soft landing and the risk of a surge in oil prices. After already seeing a 50bp back-up in short-dated US rates over the last month, we suspect the dollar does not need to rally too much further – unless Trump is successful.
At the same time, central bankers around the world (ex-Japan and Brazil) look committed to easing monetary policy. And with equity valuations looking a little stretched, we expect the defensive yen and the Swiss franc to outperform. In the bigger picture, EUR/USD is in the top half of a 1.0550-1.1150 range and the US election is key.
Looking across EM, the Czech koruna is our preferred pick in CE4. And more broadly in EMEA, the Turkish lira should continue to enjoy carry interest, while the South African rand could be due an upgrade due to better electricity supply and pension reform.
Chinese stimulus may provide a floor for the renminbi – but a much stronger currency is the last thing China needs right now. And Latam FX does not look particularly attractive. The Mexican peso may not have as easy a ride as the last time should Trump prevail.
