For the world’s top currency forecaster, the U.S. dollar is a buy whatever the outcome of the U.S. presidential election.
A Donald Trump victory would fuel greenback strength because his protectionist trade policies would drive it higher against emerging-market currencies, according to Julius Baer Group Ltd., which topped Bloomberg’s overall accuracy rankings for a second consecutive quarter. A win for Hillary Clinton would strengthen the dollar versus the yen as she would likely maintain the status quo and investors’ focus would return to the chances for a Federal Reserve interest-rate increase, according to the Zurich-based bank.
The Bloomberg Dollar Spot Index has risen more than 3 per cent from its 2016 low in May on speculation the economy is growing fast enough to prompt the U.S. central bank to move toward tighter monetary policy. With the Nov. 8 election in sight and the race too close to call, traders are crafting strategies to profit -- or at least avoid losses -- in the $5.1-trillion-a-day foreign-exchange market.
“Buy the dollar because no matter who wins, in the run up to the election, it’s so tight,“ said David Kohl, Julius Baer’s Frankfurt-based head of foreign-exchange research. “You have rising uncertainty and this is good for the U.S. dollar.”
Currency investors reeling from the worst losing streak on record view the election as another wild card as they try to foresee profitable trades. The greenback was forecast to strengthen 4 percent against the yen in 2016, while year-to-date it is down 14 percent, confounding trend-seekers.
For Julius Baer, the bank’s forecasts are based on a projected victory for Democratic nominee Clinton, while not underestimating the prospects for a win by the Republican Trump.
“The major currency against which the dollar will appreciate in a Trump scenario, but also in a Hillary Clinton scenario, is probably the yen,” Kohl said.
Rand Merchant Bank in Johannesburg, the second-best overall forecaster, also projects dollar strength in the event of a Trump triumph.
The New York real-estate developer turned politician “would favor stimulatory fiscal policy through tax cuts, which would both encourage growth and lead to tighter monetary policy,” said John Cairns, a strategist at Rand Merchant Bank in Johannesburg. If Trump wins, “it would generate a fair degree of uncertainty in global markets. Dollar strength would dominate.”
Options data indicate relatively muted election-related currency risks. One-month euro-dollar implied exchange-rate volatility, based on options that expire days before the election, is at 7.7 per cent, below this year’s average of 9 per cent. For one-month dollar-yen, it stood at 12 per cent, compared with an 11.9-per-cent average this year.
Just as Ms. Clinton, the former Secretary of State, and Mr.Trump offer vastly different assessments about the health of the U.S. economy and the policies needed to improve it, currency-market forecasts offer a wide range of possible reactions to the election.
Julius Baer’s bullish dollar call puts it at odds with investors including Stephen Jen, who say the yen will benefit from haven demand if Trump wins. Jen, the chief executive officer at Eurizon SLJ Capital Ltd. in London and a former International Monetary Fund economist, forecasts the yen may strengthen about 15 per cent to 90 per dollar in the next six months.
ABN Amro Bank NV, the third-best forecaster in the Bloomberg rankings, also predicts a Trump victory would mean a weaker dollar.
“His policies will be inward-looking and will weaken the fundamentals of the U.S. economy,” said Georgette Boele, a currency and commodity strategist at ABN Amro in Amsterdam. “The U.S. economy would be more isolated and trade growth would decline. Foreign direct investment would likely be hurt.”
The Bloomberg Dollar Spot Index, a gauge of the U.S. currency against 10 major peers, is down more than 3 per cent this year, heading for its first annual loss since 2012.
Julius Baer’s Kohl said he expects attention will shift after the elections to speculation the Fed will raise rates in December, a dollar-positive. That forecast is predicated on the baseline view of a Clinton win. The greenback would also extend gains in the event of a Trump victory, he said.
Kohl sees the greenback strengthening to $1.10 per euro by year-end, from $1.1199 as of 6:30 a.m. in London on Thursday. He estimates the dollar will reach 106 yen, from 103.53 yen.
“We lean toward a stronger U.S. dollar because we have this major risk of Trump to our baseline forecast, but even with Clinton there might be a speculation about a rate hike,“ Kohl said. Both scenarios point to a greenback rally, although “the magnitude is really different,” he said.
The Bloomberg rankings are based on currency forecasts from 65 firms for the third quarter submitted during the four preceding quarters. The forecasters are ranked based on margin of error, timing and directional accuracy.
1. Bank Julius Baer
2. Rand Merchant Bank
3. ABN Amro
4. JPMorgan Chase
5. Westpac Banking
6. Silicon Valley Bank
7. Wells Fargo
8. St George Bank
9. X-Trade Brokers Dom Maklerski
10. Danske Bank