Investing.com — Citi strategists encouraged investors to “tactically buy the dip in the US dollar” in the wake of Donald Trump’s election victory.
The bank expects the dollar to strengthen further, especially against the euro (EUR) and the Nordic currencies (Scandies), citing the recent underperformance of these currencies.
Despite the uncertainty surrounding the House outcome, strategists note that the lack of ticket splitting could indicate that a “red wave” is more likely with a Trump win, strategists said in a note.
They believe that foreign exchange markets will continue to focus on rate-sensitive currencies as it may take some time for fiscal policy developments to materialize. Market participants may also wait for confirmation that the House goes to Republicans before expecting broader changes in fiscal policy.
The Citi team expressed caution in following the USD rally immediately. The team pointed out that the market is already somewhat long on the USD and expects the Federal Reserve (Fed) to maintain a dovish stance at its upcoming meeting on Thursday.
The company points out that its strategy typically avoids chasing momentum, preferring to wait for a possible dip in the USD after the Fed meeting to buy into the currency.
In the report, strategists also pointed to downside potential in rate-vulnerable currencies such as (CNH), (TWD) and (THB), which are considered clear short positions.
Among the G10 currencies, the EUR is seen as an obvious candidate for selling due to its bilateral trade surplus with the US.
“This also applies to the Scandies (NOK and SEK), which are effectively higher beta EUR,” strategists led by Daniel Tobon noted.
“NOK could also underperform under Trump on the weaker oil front, although we find that correlations between NOK and oil are often short-lived,” she added.
SEK, meanwhile, remains highly sensitive to the global manufacturing cycle, and strategists expect trade and tariff wars “to disrupt a manufacturing recovery.”
Citi claims that a complete red sweep in the US elections could justify a 5% appreciation of the USD. The bank’s analysis shows that there is still room for another 3.4% decline before the impact of Trump’s policies is fully reflected in the currency pair.
The bank said it is looking for a retest of the trendline around 1.0790 to sell into, with tactical support around 1.06-1.0630, but they did not rule out a move towards 1.0350-1.0450 based on their residual analysis.
