Investing.com -- Over the past month, significant changes in US politics have shifted market expectations, overtaking the influence of the Federal Reserve (Fed) on the US dollar (USD). Initially, it seemed that the USD had peaked, especially with cooling US economic data and the Fed preparing for an easing cycle.
The US Presidential election on November 5th appeared far enough away to let the Fed's actions dominate market movements.
However, recent political developments and increased odds in favor of Donald Trump have led the market to factor in this major event sooner than expected, analysts at Macquarie said in a note.
As a result, any Fed-induced USD weakness is now predicted to be brief and shallow, particularly affecting rate-sensitive pairs like USDJPY, which could drop to 142 by December, the analysts added.
Broad-based USD strength is anticipated, especially impacting currencies and economies vulnerable to a potential Trump presidency, such as the Chinese Yuan (CNY) and the Taiwanese Dollar (TWD).
Election Scenarios and FX Forecasts:
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Democrat Victory: A Democrat win would likely result in mild, broad-based USD weakness, driven by Fed rate cuts. Previous FX forecasts would mostly remain valid with minor updates.
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Trump Victory: A Trump victory could significantly impact FX markets. Higher US tariffs on Chinese exports could see CNY depreciate by 5%, pushing USDCNY to 7.50 before Inauguration Day on January 20th.
The Australian Dollar (AUD) could drop to 64c due to economic repercussions. The Euro (EUR) may fall to 1.06 by December and 1.05 by mid-2025 if global US tariffs and potential deeper cuts by the European Central Bank (ECB) materialize.
Other FX Themes:
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GBP: Post-July 4th UK general election, sterling is expected to stabilize with no further upside in Cable for now.
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CAD: USDCAD could rise towards 1.40 by December as the Bank of Canada continues easing.
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AUDNZD: Anticipated early rate cuts by the Reserve Bank of New Zealand (RBNZ) could push AUDNZD up to 1.14 by December.
Latin America:
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CLP: Chile's Peso (CLP) is seen as structurally strong due to the country's export basket's importance in the energy transition.
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MXN: Mexico's Peso (MXN) is expected to perform well in either US election scenario.
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BRL and COP: The Brazilian Real (BRL) and Colombian Peso (COP) may face challenges due to ongoing fiscal responsibility concerns in H2 2024.