US: Greenback on defensive ahead of presidential election – Natixis

Nordine Naam, Research Analyst at Natixis, notes that after briefly testing 99, the DXY dollar index corrected, especially this past week, pulling back to almost 97.

Key Quotes

“The sharpest corrections were against G10 currencies, the US dollar managing to hold steady against emerging currencies, even to appreciate against the Mexican peso.

The US dollar’s correction is due to the latest opinion polls showing that Donald Trump is closing the gap in the wake of the latest revelations by Wikileaks concerning Hillary Clinton, prompting the FBI to reopen its investigation into her emails. Even though the Democratic candidate is still ahead in the polls, the race is much tighter, with a still large number of undecided voters.

In particular, polls are very tight in the swing states, including Florida, North Carolina and Nevada. There is also the matter of determining whether Democrats will at least take control of the Senate, bearing in mind the House of Representatives will remain under Republican control. A scenario in which the Democratic Party controls neither the Upper House nor the Lower House would be negative as Hillary Clinton would be unable to push through any reforms, much as is now the case for Barack Obama.

Donald Trump’s surge in the polls triggered a downturn by risky assets, but not to an extent such as to fuel a rebound by the US dollar as happened in the past, when risk aversion was towering on high. The S&P 500 is 2.7% off its 24 October level, which is paltry to be hoping there will be a rebound by the US dollar fuelled by capital repatriations. The hawkish rhetoric of the Federal Reserve and the good October nonfarm payrolls should limit the greenback’s correction in the days leading up to the election.

If there is a victory of Donald Trump, US equity markets will extend their correction, causing the US dollar to rebound on account of its safe haven status, but this will be temporary, as it will go on to correct in the following weeks, as the US economy will be staring at a stagflation scenario.

However, our baseline scenario remains for a victory of Hillary Clinton, with a divided Congress. In this case, there would be continuity at policy level compared with her predecessor, with the prospect of a hike in the Fed Funds rate in December. If this scenario unfolds, the DXY dollar index would recover back towards 98.”