US: Lower political risk premium and the stronger USD – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the final US Presidential debate has had only a limited impact on the foreign exchange market.

Key Quotes

“The Mexican peso has strengthened only marginally overnight. Heading into the final debate Donald Trump was trailing well behind Hillary Clinton in the latest opinion polls highlighting that he needs a game changing moment. According to FiveThirtyEight.com’s poll only model they estimate that the likelihood of Donald Trump becoming President has nose-dived recently to as low as a “one in eight” probability. The FX market has subsequently adjusted to leave minimal risk discounted that Donald Trump could become President which has resulted in the Mexican peso rebounding strongly by around 8% since the end of last month.

Last night’s debate has not provided that game changing moment for Donald Trump. A snap poll carried out by CNN immediately after the debate revealed that 52% of respondents believed that Hillary Clinton had won compared to 39% for Donald Trump. Comments made during the debate by Donald Trump in which he refused to say whether he’d accept the election results if he loses have captured the media’s attention and are unlikely to help his campaign.

The reduction in the political risk premium has helped the US dollar to strengthen broadly this month. The US dollar has derived support as well from comments overnight from Fed Vice Chair Dudley who stated that “I do expect to see an increase [in the fed funds rate] later this year”. However, he did caution that it is dependent on the US economy remaining on its current trajectory and stressed that there is “not a lot of urgency to tighten policy aggressively because we don’t have an inflation problem”. He also described monetary policy setting as not that “accommodative”