Trump, Clinton Victory Already Holding US Dollar Back Argue BMO Capital

Trump, Clinton Victory Already Holding US Dollar Back Argue BMO Capital

23 March 2016, 13:57
Vasilii Apostolidi
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Both a Donald Trump and Hillary Clinton victory in the November election are keeping the US dollar under pressure argues a prominent currency analyst.

The US dollar is already weakening on the back of political risk argue BMO Capital Markets in their latest forecast note on the US dollar.

The note comes at a time of subdued performance in the Greenback with actions at the US Federal Reserve taking the plaudits for the weakness.

However, markets may be overlooking the impact on hedging demand, in the face of political risks, as a driver in weaker dollar exchange rates.

If this is the case, we could well see such dynamics pick up closer to the election date.

“Our normal rule of thumb is that elections are negative for the currency of a net debtor country because they cause trigger hedging," says BMO’s Greg Anderson, Global Head of FX Strategy, "given the USD’s safe haven status, that rule may not hold for the US, but we think it does."

Importantly, Anderson argues the process of election ‘currency-weakening’ has already started in this election cycle, which is earlier than usually to be expected:

“Normally election uncertainty becomes an issue at about the 3M hedging horizon, but the 2016 election seems to have attracted the FX market’s attention unusually early.”

Anderson suggests a number of reasons why this might be the case, the first being the protectionist political agendas of both lead candidates:

“Foremost are the Donald Trump phenomenon and his accusations that China, Japan and others manipulate exchange rates for trade advantage. With her opposition to the TPP, Hillary Clinton is also showing a protectionist side, and protectionists normally look to suppress their currencies.”

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He further sees ‘uncertainty’ overshadowing the dollar during the election process, including the possibility that Donald Trump’s nomination for the Republican party candidature and the Republican Convention in July may be contested:

“The Republican convention (July 18-21) looks increasingly likely to be contested, which adds to uncertainty. So does the ongoing FBI investigation of Hillary Clinton’s email issues. With its potential closeness and these issues, the election looks likely to be a negative factor for the USD until Election Day (08-Nov).”

BMO Capital had forecast the dollar's bull-run to end in mid-2016, but they believe the gains may have already peaked.

As such, they see the maximum potential in USD as being below the highs already set in 2016.

Credit Suisse downgrade dollar forecasts because of Trump

Previously on PSL we discussed ‘Trumpxit’ in our article: “US Dollar's Next Big Thing is a 'Trumpxit Premium' Warn Credit Suisse”, in which we reported how the Swiss lender forecast a weakening in the dollar due to fears Donald Trump might become president and isolate the US from global trade.

Analysts at Credit Suisse even went as far as downgrading their forecasts for the dollar as a result of the Trump phenomenon.

The researchers even went as far as speculating that Trump might be the cause of recent inexplicable decline in the dollar despite strong macro-economic data, since ‘Super Tuesday’.

‘Super Tuesday’ is an important day for presidential nominees when the main contenders emerge and other runners are forced to pull out, in their original note Credit Suisse commented that:

“Super Tuesday results highlighted more strongly the possibility that anti-establishment candidates running on a platform that can be judged relatively hostile to existing US trade and financial arrangements are genuine contenders for the US presidency.”

The Suisse note went on to argue that the impact of the Trump phenomenon combined with: “the wider USD story also more challenged near term,” is likely to witness an “extension” of current trends, “with AUDUSD reaching 0.78 and USDCAD 1.30 on a 3-month horizon.” As well as a gain for wider EM and LATAM currencies against the dollar.

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