USD: Election and FOMC meeting pose key tests for dollar’s rebound – MUFG

Analysts at MUFG Bank, point out that the stronger US growth figures and fiscal stimulus optimism are helping to lift US yields and encouraging a stronger US dollar. They warn that the US election outcome and the Federal Reserve meeting should help to dampen greenback’s rebound.

Key Quotes:

“The USD has been rebounding ahead of next week’s US Presidential election. It has helped lift the dollar index back towards the top of its recent trading range between the 92.000 and 94.000. The USD’s upward momentum has been mainly driven by negative developments overseas rather than any material reassessment of the likely outcome from the US Presidential election. The re-imposition of a national lockdown in France has triggered a sharp correction lower for risk assets and helped to boost the safe haven appeal of the USD. There is a heightened risk other countries in Europe will follow France’s lead. At the same time, the US economy has been and is expected to be less negatively impacted by the second and third waves of COVID.”

“Assuming there is no significant surprise in the Presidential race, the initial market reaction is likely to be driven more by whether the Democrats are able to take control of the Senate as well. A Blue Wave would be the most supportive outcome for risk assets encouraging speculation over even bigger fiscal stimulus plans and improving global trade relations. It would provide a shot in the arm for high beta currencies especially Asian, emerging and commodity-related currencies with the exception of the rouble.”

“Our forecast for USD weakness against the majors in the year ahead is built on the assumption the Fed will step up QE.”

“A shock Trump victory and/or the Republicans maintaining control of the Senate will likely be required to reinforce the USD’s upward momentum in the week ahead.”