Recent changes in US politics have shifted market expectations for the US dollar (USD). Macquarie analysts now see significant impacts from the upcoming US Presidential election. This event is overtaking the influence of the Federal Reserve (Fed) on the USD. According to Macquarie, the USD forecast is now more bullish.
Political Developments and Market Impact
Initially, it seemed that the USD had peaked. Cooling US economic data and the Fed preparing for an easing cycle contributed to this view. However, recent political developments have changed the market’s outlook. Increased odds in favor of Donald Trump have led the market to factor in this major event sooner than expected. Analysts at Macquarie believe this will result in brief and shallow USD weakness induced by the Fed.
Election Scenarios and FX Forecasts
Democrat Victory: A Democrat win would likely result in mild, broad-based USD weakness. This would be driven by Fed rate cuts. Previous FX forecasts would mostly remain valid with minor updates.
Trump Victory: A Trump victory could significantly impact FX markets. Higher US tariffs on Chinese exports could see CNY depreciate by 5%, pushing USDCNY to 7.50 before Inauguration Day. The Australian Dollar (AUD) could drop to 64c due to economic repercussions. The Euro (EUR) may fall to 1.06 by December and 1.05 by mid-2025 if global US tariffs and potential deeper cuts by the European Central Bank (ECB) materialize.
Other FX Themes
GBP: Post-July 4th UK general election, sterling is expected to stabilize. No further upside in Cable is anticipated for now.
CAD: USDCAD could rise towards 1.40 by December as the Bank of Canada continues easing.
AUDNZD: Anticipated early rate cuts by the Reserve Bank of New Zealand (RBNZ) could push AUDNZD up to 1.14 by December.
Latin America: Chile’s Peso (CLP) is seen as structurally strong due to the country’s export basket’s importance in the energy transition. Mexico’s Peso (MXN) is expected to perform well in either US election scenario. However, the Brazilian Real (BRL) and Colombian Peso (COP) may face challenges due to ongoing fiscal responsibility concerns in H2 2024.
Conclusion
Macquarie’s bullish outlook on the USD into 2025 is based on the potential re-election of Donald Trump. The anticipated broad-based USD strength will especially impact currencies vulnerable to a Trump presidency. Analysts suggest that the political developments are key to understanding future market movements. The USD forecast highlights the significance of the upcoming US Presidential election on currency markets.
