“The Dollar has fallen sharply over the past week, as polls have tightened into the upcoming election. On a trade-weighted basis versus the majors, the greenback is down more than one percent, a number that understates the decline because the fall in oil prices has weighed on the Canadian Dollar, which has a large weight in our Dollar index.
We show that recent Dollar weakness is associated with a meaningful pullback in market pricing for the Fed, with cumulative hikes through end-2017 falling to 32 bps as of Friday, down from 41 bps a week earlier. That said, the drop in the Dollar has gone beyond what rate differentials indicate, suggesting that a risk premium has formed even beyond expectations for Fed hikes.
While near-term focus in the market is on potential further declines in the Dollar in the event of a Trump victory, the likelihood of a meaningful Dollar rise in a Clinton win scenario is rising. In particular, based on the make-up of the Dollar sell-off over the past 10 days, we think the greenback could recover the most ground against the Euro and the Yen.
Although we are bearish on the Canadian Dollar, targeting 1.37 by year-end, we think it is better to steer clear of long $/CAD on a Clinton win, because there could be a material bounce in risk appetite that would drive oil prices higher, temporarily buoying CAD. Finally, RMB depreciation pressure is likely to mount again on a Clinton win, as the Dollar gains into the December FOMC, where our economists expect a hike with a large probability”.
Copyright © 2016 Goldman Sachs, eFXnews™
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