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FX | Economy

FX Focus: DXY – Possible Outcomes for USD Post US Elections

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Forecast Spot 0 - 3m 6 - 12m Long-term
DXY 104.25 102.88 103.21 95.93

*Forecasts as of November 2024.

 

  • It’s been a rates story for the DXY Index since late September, with markets paring back the extent of Fed rate cuts discounted due to stronger US data lowering recession odds and the return of the Trump 2.0 trade.  This has led to US rates rising faster than the rest of the world (RoW) which in turn, has supported the almost 4.5% rise in DXY since late September to slightly above the 104.00 level. Since late September there is also evidence to suggest markets have re-priced the Trump 2.0 trade back into DXY. Inflation expectations and USD have risen with Trump’s polling on the view that his policies would likely boost domestic demand while encouraging supply chain dislocations which could be inflationary and significantly alter the path of the Fed from its current rate cut cycle.  This has led to a culling of USD short positioning by speculative accounts.
     
  • Looking back at the 2016 and 2020 US elections to estimate the likely FX volatility in the 2024 election, the 2016 election saw the Trump win strengthening DXY with CNY, EUR, MXN and JPY most impacted. While the first 3 took a hit on concerns about Trump’s tariffs, JPY was also impacted by US rising yields due to Fed hiking rates - which is not the case now.  Notably, the FX impact under a Trump win peaked in 1 month (MXN took a bit longer) and faded thereafter with Fed policy remaining the main driver of FX sentiment for the rest of Trump’s presidency. Meanwhile, the 2020 US election saw Democrats win the White House with Biden the president. Like the 2106 election, Biden was assisted by a clean sweep of Congress in the first half of his presidency only to lose one house of Congress during the second half. Under a Biden win, DXY fell across the board with the impact lasting longer than gains seen under a Trump win, but Fed policy once again stood as the key driver of FX sentiment for the bulk of Biden’s presidency.
     
  • Based purely on the previous two election outcomes, a Trump presidency could be tactically bullish for DXY (more so under a Red sweep) but potentially fading in early 2025 (and probably even earlier if there is no Red sweep) as markets already appear to be partially positioning for the Trump 2.0 trade and as the Fed re-engages in its rate cut cycle. On the other hand, a Harris presidency is likely to be tactically bearish for DXY with potentially greater losses (and lasting longer) than DXY gains under Trump win as markets unwind the partial positioning of the Trump 2.0 trade and DXY is also weighed down by the Fed re-engaging its rate cut cycle.
     
  • All this is conjecture of course and there are key differences between the previous two and current election - Trump’s fiscal and tariff agenda appear to be much bigger this time around and the presidential election is taking place against the backdrop of a global central bank easing, rather than a tightening cycle and heightened geopolitical tensions. There is also greater obscurity of the policy platform of either candidate as is the prospect of a mixed Congress that would make it difficult for either candidate to implement his/ her policy agenda in full.

 

US rates (2yr bond yield – blue) and DXY (black) have risen heading into the US election

Source: Bloomberg, October 28, 2024

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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