US election could be USD positive – RBC CM

Elsa Lignos, Research Analyst at RBC Capital Markets, suggests that in order to see USD break out of its current range, we will either need to see the forward curve steepen more meaningfully or we need a different driver and one possibility could be the US Election.

Key Quotes

“We would expect a Trump victory to be USD-positive. Trump would struggle to pass his huge fiscal stimulus plans through congress but the shift towards protectionism would favour the US (a trade deficit country with good domestic demand) and more importantly his plans for a deemed repatriation tax would lead to big capital inflows which based on the experience of the 2005 Homeland Investment Act, would be very USD-bullish.

Since the first US Presidential debate, Trump’s probability of victory has fallen sharply but there is still a month to go until Election Day. Also though so far Clinton has given no indications of a plan for a repatriation tax break, she has not ruled it out either – it could be one way to finance her plans for fiscal stimulus without raising existing taxes on US households or corporates.

The final risk to mention is a twin equity/bond market sell-off – we have seen tentative signs of bonds and equities selling off together but if that became a widespread theme, it would be USD-positive against every other currency. Absent these risks, we look for USD to remain broadly trendless into year end.

6-12 Month Outlook – Fed-dependent recovery

The fundamentals of the US economy appear strong enough to sustain modest rate hikes. We are still so far below the neutral rate, it is hard not to look for some USD strength as the Fed eventually normalises.”