Institutional Insights - Credit Agricole USD: the Harris vs Trump trade
Institutional Insights - Credit Agricole USD: the Harris vs Trump trade
The USD October rally continues and some of the currency’s recent
gains reflect Donald Trump’s recovery in the polls ahead of the 5
November US presidential election. That being said, the race for the
White House remains very close and its outcome difficult to predict.
Recent client meetings have further suggested that the political
uncertainty may have forced FX investors to keep their market exposure
light. Our FX corporate clients have also signalled they have been front-
loading their hedging programmes and switching to hedging via FX
forwards for the same reason.
In particular, FX investors have been focusing on two equally-likely
outcomes from the US elections: (1) President Kamala Harris with a
divided US Congress that could result in a dysfunctional government but
leave the US fiscal policy stance and economic outlook little changed; or
(2) President Donald Trump and a ‘red wave’ in the US Congress that
could lead to extra fiscal spending and trade tariffs, in a boost to US
inflation and thus to the view that the Fed stance could be less dovish
than expected.
The above suggests that the risk-reward ahead of the vote could be for
muted downside but aggressive upside for the USD. A Harris victory
could be seen as confirming the status quo and weighing on the USD at
first, as Trump hedges are unwound. A US soft landing could soon boost
the appeal of the USD-assets, however. A Trump victory could result in
a stronger USD due to expectations of stickier inflation and a less dovish
Fed as well as growing macro and geopolitical risks. We also note that
Asian currencies bore the brunt of the USD rally after Trump won in 2016.
The data calendar is relatively light next week so FX investors will
continue to closely follow the polls ahead of the US election. Evidence
that Trump’s rebound in the polls has continued could see the USD
regaining more ground. Elsewhere, focus would be on the global
preliminary PMIs for October as well as a number of Fed, ECB, BoE and
BoJ speakers at the annual IMF and World Bank meetings in Washington
DC. North of the border, the BoC looks poised to speed up its easing
cycle with the delivery of its own 50bp cut in October, following a steeper
inflation undershoot last month.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!