Citi strategists have emphasized the positive impact of the U.S. election on the dollar. They believe that trade and tariff policies, particularly those targeting China, will play a significant role in driving a bullish outlook for the USD. Currencies like the Chinese yuan, euro, Mexican peso, Taiwanese dollar, and Thai baht are identified as vulnerable to these risks. However, despite this stance, Citi acknowledges that other factors such as Federal Reserve policy, recession risks, and global economic conditions could also influence the dollar in the coming months.
Citi outlines various election scenarios, with a “red wave” scenario, where Trump wins and Republicans gain control of both chambers of Congress, being seen as the most USD positive. This outcome could result in a focus on improving the trade deficit through tariffs and potential fiscal expansion through tax cuts and deregulation. However, Citi also notes that the overall macroeconomic landscape remains uncertain, and other catalysts may become more influential in determining the dollar’s performance. Regardless of the election outcome, Citi expects that any USD strength related to the election will likely be priced in well before November.
Market participants typically start trading election themes two to three months ahead of the event. With the U.S. presidential debates in September seen as a key point for markets to start pricing in election outcomes more seriously. However, Citi warns that the peak of USD strength related to the election may occur around that time. They suggest that the election could be a “sell the news” event for the USD and for volatility. Additionally, they highlight that Federal Reserve policy, interest rates, recession risks, and global economic developments will also play a crucial role in shaping the dollar’s performance in the near future.
While Citi’s outlook on the U.S. election is optimistic for the USD, it is essential to consider the various factors that could influence the dollar’s performance. While trade and tariff policies are significant drivers of a bullish USD outlook, other macroeconomic conditions, Federal Reserve policy, and global economic developments could counteract this impact. It is crucial for investors to remain vigilant and constantly reassess their positions to navigate the volatile market environment effectively.