Citi strategists believe that a Trump presidency is unlikely to lead to a weaker dollar, despite some factors suggesting otherwise.
The Wall Street firm’s base case remains that the US election will be positive for the dollar. They believe this outcome will likely be fully priced in by the November 5 election.
“We reiterate why we think the election will be USD positive in our latest FX Forecasts, however, we recognize Trump comments in a recent interview imply a desire for a weaker USD,” they noted.
Polls and betting markets have shifted in Trump's favor since the June 27 debate. While Citi notes that such trends can be volatile and subject to change, they emphasize that it is still too early for long USD election trades. The recent USD weakness was attributed to the unwinding of the French election premium and dovish Fed repricing, but Citi believes the USD has now largely caught up to these factors.
Strategists caution against premature long USD trades, noting that market sentiment can swing, particularly as the election approaches and the Democratic candidate becomes more defined. They suggest waiting until August or September to consider long USD trades, historically a period when markets begin to trade elections more actively.
A key aspect of their analysis focuses on EURUSD, with lower levels remaining their favored expression in the G10 space. They point out that Trump's focus on trade and broader relations with the EU could cap any EURUSD rallies, particularly around the 200-week moving average, which has been a significant resistance level.
Addressing currency-related comments from Trump’s recent interview, Citi highlights Trump's acknowledgement of a "big currency problem" due to the strong dollar and weak yen and yuan.
While some of Trump's advisors have pushed for a weaker USD, Citi recalls that during his first administration, despite efforts to weaken the dollar, trade dynamics ultimately supported a stronger USD.
The analysts conclude that unless there is a coordinated international effort to weaken the dollar, which they do not foresee, Trump’s policies are unlikely to be USD negative despite his comments.
“In 2018-2019, when Trump pivoted from domestic growth policy to trade, increasing rhetoric on trade and tariffs saw USDCNH higher,” strategists highlighted.
“Absent a coordinated, international effort to weaken the USD , we do not expect Trump policies to be USD negative despite the rhetoric,” they concluded.