C8 Hedge – Currency Compass – Election Special – November 2024
The strong USD bias worked well for our FX models last month, with our dynamic hedge adding over 1% outperformance for EURUSD and GBPUSD, and over 3% for USDJPY. We note, however, that our models have now moved to neutral for the USD against the EUR and GBP, though still look for higher USDJPY. Reducing FX risk may well be sensible given the closeness of the US Presidential election, and doubts about the accuracy of polls. Though, as we note overleaf, late momentum now marginally favours Harris.
The UK budget was not as radical as some commentors feared, so the immediate GBP reaction was muted, as we thought likely. Looser fiscal policy will keep interest rates higher than before, a GBP positive. In contrast, the lack of any growth-enhancing measures was a surprise, as was removing inheritance tax exemptions for previously non-domiciled residents. This points to negative GBP capital flows over time.
Looking forward to November, tomorrow’s US elections are the major risk event, see our currency assessment below. We see rate cuts of 25bp from both Fed and BoE on 7 Nov, which is as expected. However, the FOMC press conference will be closely watched for any guidance on US rates post-election.
Finally, keep government bond performance on the radar screen (see chart right), as concern about the sustainability of fiscal policy across the globe is pushing up long-end bond yields. Whilst this is not yet impacting FX markets, a continued loss of confidence can create a risk-off environment, which would knock stock markets, and see a flight into JPY, CHF and USD.
Currency Focus: The US Election and the USD
The US elections on 5 November are the month’s key event. Last month, it was clear that Trump was recovering ground lost after Harris took over the Democrat presidential campaign. However, in the latter stages, the Trump campaign has lost momentum, with a return to some wayward speeches directed at his core constituency. Whilst the polls show the race is still evenly split (see charts below), the momentum has returned to the Democrat candidate. The betting odds still favour Trump but that may be a reflection of Republican supporters trying to drive the narrative.
Indeed, to add to the uncertainty, given the partisan nature of the election campaign, there are doubts that opinion polls reflect underlying voter intentions. A Harris victory will likely trigger some USD weakness, but this is unlikely to be extended. After being USD positive, it is notable that our FX models are now neutral USD against the EUR and GBP, whilst still positive for USDJPY (which is more JPY related). Lastly, we note that both campaigns are highlighting voting irregularities, so expect some state announcements to be delayed by legal challenges.
Key Event Dates
5 November AUS RBA Meeting Expect unchanged rates at 4.35%
5 November US Presidential Election Polls remains evenly split on Harris v Trump, but late momentum marginally favours Harris
7 November US FOMC Meeting Expect 25bp rate cut to 4.50-4.75%
7 November UK BoE Meeting Expect 25bp rate cut to 4.75%
27 November NZ RBNZ Meeting Expect unchanged at 4.75%
12 December EU ECB Meeting Expect 25bp deposit rate cut to 3.25%
18 December US FOMC Meeting Expect 25bp rate cut to 4.25-4.50%
19 December Japan BoJ Meeting Expect 25bp hike to 0.5%
19 December UK BoE Meeting Expect 25bp rate cut to 4.50%