Prospect of Trump or Clinton Victory is Contributing to Weaker US Dollar Already Argue BMO Capital

Both a Donald Trump and Hillary Clinton victory in the November election are putting the US dollar under pressure argues a prominent currency analyst.

• “Normally election uncertainty becomes an issue at about the 3M hedging horizon, but the 2016 election seems to have attracted the FX market’s attention unusually early.”
• Credit Suisse warn clients on weaker USD thanks to political risks

A new force is keeping a lid on the dollar - a force we suspected would arise in 2016, but not as early as it has.

The US dollar is said to already be experiencing weakness that can be attributed to political risk stemming from the US presidential elections argue BMO Capital Markets in their latest forecast note on the US dollar.

The note comes at a time of subdued performance in the Greenback with actions at the US Federal Reserve taking the plaudits for the weakness.

The event markets assess similar odds (23%) that Donald Trump is the next US President as the UK votes to leave the EU. (Given, the chances ascribed to the latter have risen since the events in Brussels).

"While investors responded dramatically to the latter, the former has yet to emerge as a talking point or an investment consideration," says Marc Chandler at BBH Foreign Exchange.

However, there are signs that markets are, in fact, starting to price a political risk premium into the dollar's value.

Hedging demand by foreign investors looking to protect their US-based investment exposure to political risks are said to be rising, and a side-effect of this hedge demand is a weaker currency.

“Our normal rule of thumb is that elections are negative for the currency of a net debtor country because they cause trigger hedging," says BMO’s Greg Anderson, Global Head of FX Strategy, "given the USD’s safe haven status, that rule may not hold for the US, but we think it does."

Importantly, Anderson argues the process of election "currency-weakening" has already started in this election cycle, which is earlier than usually to be expected:

“Normally election uncertainty becomes an issue at about the 3M hedging horizon, but the 2016 election seems to have attracted the FX market’s attention unusually early.”

Anderson suggests a number of reasons why this might be the case, the first being the protectionist political agendas of both lead candidates:

“Foremost are the Donald Trump phenomenon and his accusations that China, Japan and others manipulate exchange rates for trade advantage."

"With her opposition to the TPP, Hillary Clinton is also showing a protectionist side, and protectionists normally look to suppress their currencies.”

The possibility has grown that anti-establishment candidates running on a platform that can be judged relatively hostile to existing US trade and financial arrangements are genuine contenders for the US presidency.

Anderson sees uncertainty overshadowing the dollar as having started earlier in this election cycle than has been the case in the past.

BMO Capital had forecast the dollar's bull-run to end in mid-2016, but they believe the gains may have already peaked, months earlier than they had initially expected.

As such, they see the maximum potential in USD as being below the highs already set in 2016.

Credit Suisse Downgrade Dollar Forecasts on Trump

Previously on PSL we discussed ‘Trumpxit’ in our article: “US Dollar's Next Big Thing is a 'Trumpxit Premium' Warn Credit Suisse”, in which we reported how Credit Suisse forecast a weakening in the dollar due to fears Donald Trump might become president and isolate the US from global trade.

Analysts at Credit Suisse even went as far as downgrading their forecasts for the dollar as a result of the Trump phenomenon.

The researchers speculate Trump might be the cause of recent inexplicable decline in the dollar despite strong macro-economic data, since ‘Super Tuesday’ when it became clear anti-establishment candidates were in with a strong shot.

This marries with the observations held by BMO Capital that hedging against risk is already taking place and creating an unseen source of USD weakness.

Credit Suisse argue that the impact of the Trump phenomenon combined with: “the wider USD story also more challenged near term,” is likely to witness an “extension” of current trends, “with AUDUSD reaching 0.78 and USDCAD 1.30 on a 3-month horizon.”

We could also see a gain for wider emerging market and Latin America currencies against the dollar as a result.