by NGOC ANH 21/05/2024, 11:07

How will Greenback move before US presidential election?

The FX market remains calm. A slight levelling in the growth gap between the US and other countries, notably in Europe, is pegging the US dollar back but big moves in the greenback may have to await November’s presidential election.

 It looks as if the election outcome will dictate the next significant directional change in the US dollar. 

>> Prospects for the US dollar against major currencies

The theme of US economic exceptionalism has been with us for some time and appears to have supported the US dollar, partly because it has led to speculation that the FED will be slow to cut rates. But this exceptionalism is waning, both because the US economy is slowing down while the likes of the euro zone and UK slowly recover from the recessionary conditions seen in the second half of last year.

Admittedly, these changes are slight; the US could still grow by around 2% this year while the UK and euro zone will be lucky to see half this rate. Nonetheless, the direction of travel is the key and, this is serving to support the euro against the US dollar as economic data surprises in the region have more frequently been better than those we have seen in the US.

However, the relationship between data surprises and euro/dollar is not perfect – and nor should we expect it to be so. Currencies are influenced by a multitude of factors and we should not expect any one of these, such as data surprises, to perfectly mimic movements in the currency. For instance, economic data surprises might be more positive for the euro at the moment but it is the ECB that’s likely to act first with monetary policy easing.

A June rate cut seems a done deal while we do not think that the Fed will start to ease until September at the earliest, and even this requires a run of good inflation data. But just whether the reduction of the growth gap and divergent monetary policy can break euro/dollar free of the 1.05-1.10 range that has been in place for much of the last eighteen months remains to be seen.

The Standard Bank’s suspicion is that this range could persist for a while yet; possibly right up to the November 5th presidential election in the US. For barring any shocks, it looks as if the election outcome will dictate the next significant directional change in the US dollar. For, when you think about it, issues such as US economic exceptionalism and hawkish Fed policy owe much to the US fiscal position. Some argue that the government has pushed the fiscal accelerator too hard; storing up a debt crisis in the future. We tend to be a bit more sanguine about this.

Nonetheless, there’s no getting away from the fact that fiscal policy has been the key to US dollar strength and its direction after the election will therefore be critical for the dollar. On this score, the likelihood of a win in November for former president Trump could be influenced by the outcome of his criminal trial. Steve Barrow, Head of Standard Bank G10 Strategy said we would find this out as soon as this week, as lawyers seem likely to conclude their case today or tomorrow. But while the outcome will undoubtedly create huge amounts of speculation concerning its implication for the election, the outcome of the November 5th poll is going to remain too difficult to call. As a result, he suspects that the market won’t be able to price in any particular outcome and that will compress all the response into the immediate post-election period.

>> What will happen to the US dollar if Trump wins again?

Opinion polling continues to put Biden behind Trump but we suspect that there will be some catch-up, leaving the outcome on a 50:50 knife edge come November 5th . “If we were forced to offer an opinion on the outcome we’d lean towards a victory for the incumbent; a result that we feel is more likely to usher in a modest decline in the greenback. The sense that other economies might be redressing some of the growth differential with the US is just one factor that seems to be giving a lift to ‘risk’ assets such as equities and also playing into the hands of riskier currencies”, said Steve Barrow.

Just like euro/dollar, it may be premature to think that the likes of the aussie, Canadian dollar and Scandinavian currencies are about to lift off against the greenback. There have been many false dawns and more could linger ahead. Nonetheless, Steve Barrow senses that these currencies will stage a longer-term recovery against the US dollar even if there are bumps along the way. The key here is that the Fed starts to cut rates, even if it is behind other major central banks. “We continue to lean to the view that the Fed will cut rates three times this year starting in September and, if that proves correct, then so should our call for riskier currencies to climb against the US dollar”, said Steve Barrow.