Investing.com — Over the past month, significant changes in US politics have shifted market expectations, overtaking the Federal Reserve’s (Fed) influence on the (USD). Initially, it looked like the USD had peaked, especially as US economic data cooled and the Fed prepared for an easing cycle.
The November 5 US presidential election seemed far enough away for the Fed’s actions to dominate market movements.
However, recent political developments and increased odds in favor of Donald Trump have led the market to take into account this major event earlier than expected, Macquarie analysts said in a note.
As a result, any Fed-induced weakness in the USD is now forecast to be short-lived and superficial, mainly impacting rate-sensitive pairs such as the , which could fall to 142 in December, the analysts added.
Broad-based USD strength is expected, which will mainly impact currencies and economies vulnerable to a potential Trump presidency, such as the Chinese Yuan (CNY) and the Taiwan Dollar (TWD).
Election Scenarios and FX Predictions:
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Democratic victory: A Democratic win would likely result in mild, broad-based USD weakness, driven by Fed rate cuts. Previous currency predictions would remain largely valid with minor updates.
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Trump victory: A Trump victory could have a significant impact on currency markets. Higher US tariffs on Chinese exports could cause the CNY to depreciate by 5% to 7.50 before Inauguration Day on January 20.
The Australian dollar (AUD) could fall to 64c due to economic fallout. The euro (EUR) could fall to 1.06 in December and 1.05 by mid-2025 if global US rates and possible deeper cuts by the European Central Bank (ECB) materialize.
Other FX themes:
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GBP: After the July 4 general election in the United Kingdom, the British pound is expected to stabilize, with no further upside potential for the cable sector for the time being.
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CAD: could move closer to 1.40 in December as the Bank of Canada continues to ease.
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: Expected early rate cuts by the Reserve Bank of New Zealand (RBNZ) could push the AUDNZD to 1.14 in December.
Latin America:
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CLP: The Chilean peso (CLP) is seen as structurally strong due to the importance of the country’s export basket in the energy transition.
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MXN: The Mexican peso (MXN) is expected to perform well in both US election scenarios.
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BRL and COP: The Brazilian real (BRL) and the Colombian peso (COP) may face challenges in the second half of 2024 due to ongoing concerns over fiscal responsibility.
