US: Policy dynamics, Clinton favours USD – ANZ

Research Team at ANZ, suggests that against the outlook for gradually higher rates from the Fed as US inflation is returning towards trend, ANZ continue to favour EUR/USD downside.

Key Quotes

“The markets may want to await the outcome of the US Presidential Election on 8 November before getting excited about the USD’s upside. But price action would imply that the dollar is responding positively to expectations of a Clinton victory. If this is indeed the case, we anticipate the USD should perform well. Our forecasts continue to look for a move in the euro down to a 1.00-1.05 range over the coming months.

Campaigning during the election has focused on more expansionary fiscal and incomes policies, irrespective of who is elected. For an economy that is effectively operating at full employment and with a central bank that anticipates a gradual increase in interest rates in coming years, the policy mix is supportive of the USD.

We forecast a 25bps rise by the FOMC in December this year and two more similar moves next year. This policy mix contrasts with the euro area where fiscal policy is expected to be neutral next year and the ECB has committed to keeping interest rates at or below current levels well past the ending of QE.

 A caveat to our view is a Trump victory. Such a scenario would likely have mixed implications for the USD given the higher level of uncertainty surrounding the implications of many of Trump’s positions, eg tariffs with China, a wall with Mexico, the leadership of the Fed, etc. That said, markets may be concerned about his fiscal profligacy (his tax cutting proposals are materially more expansionary than Clinton’s).”