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Rough ride for USD?
The uncertainty of whether Donald Trump or Hillary Clinton will be the next president will occupy considerable bandwidth in Q4. According to John J. Hardy, Head of FX Strategy, Saxo Bank, the supposed no brainer is that a Trump victory would mean greater uncertainty and a greater risk of an asset market correction with supposed lack of faith in the US dollar and liquidation of US treasuries. A focus on the fiscal implications of some of his spending and tax cut proposals is also cited as a USD negative. But the USD might just as well strengthen under Trump as well, Hardy says. Two reasons: markets might position for a massive corporate profit repatriation down the road and fewer risks to the US economy than elsewhere. As well, new Trump fiscal outlays will only arrive with a long lag, and the Fed may be reluctant to play ball with Trump, who would inevitably politicize Fed policymaking, he said.
JPY A Tough Call
The yen is a difficult call, as the near-term implications of what was a de facto BoJ taper this September are JPY positive, but Japan will likely be the first major currency to look at fiscal stimulus, which will drive real rates lower, Hardy says. The euro may prove relatively resilient as well on the ECB’s stepping away from QE, but a new political crisis over the future of the EU and the ongoing challenges to Europe’s banks could force Europe more quickly towards a massive new easing with fiscal support that could see the euro sharply weaker versus the US dollar.
Sterling To Fall
The Pound sterling is expected to find a low point some time in Q4, though there could be a risk of weakness stretching into Q1, Hardy says. “Sterling is getting very cheap, but we may need to see signs of the developed world’s largest current account deficit turning before the currency can stabilize and possibly rally. Sterling could turn the corner first against a likely troubled euro in 2017,” he adds.
When most traders thought an agreement to cut production was a mission impossible, OPEC surprised on September 28 by announcing a preliminary deal to reduce output by about 700,000 barrels a day. Battered finances of major oil producing countries forced the leaders to put their differences to one side and end a 2-year unofficial war on shale. Crude prices surged by 6% following the news and sent Asian equities higher with energy stocks leading the rally. According to FXTM Chief Market Strategist Hussein Sayed, “Such a deal should have had a stronger impact on oil, I would say at least a 10-15% rally, but the limited details of the agreement put a limit on the upside and we will now have to wait until November 30 to see whether the agreement will translate into actions, and whether non-OPEC oil producers will follow suit.”