Expect the U.S. dollar to make significant gains, and the loonie to fall, if Donald Trump defies the odds and becomes president.
And if Hillary Clinton wins? The U.S. dollar would also rise, though for different reasons, market strategists say, and not by nearly as much.
As of Wednesday morning, polling-averages site FiveThirtyEight.com gave Clinton an 86% chance of winning the presidency, as Trump’s chances declined over the weekend to 14%. Betting markets have assigned similar probabilities.
While a Trump victory on November 8 is improbable, it’s not remote. Given Trump’s better chances earlier in the race, advisors and portfolio managers have been preparing for either scenario.
A Trump claim to the White House would trigger a flee to safety, pushing up the U.S. dollar and bond yields, says Christopher Gannatti, associate director of research for WisdomTree.
“That initial reaction in November would still lead to a stronger dollar, would still lead to U.S. Treasury yields tending to fall rather than rise,” Gannatti says. “It’s not [as if] suddenly people are going to say, ‘I no longer have faith in the full […] credit of the U.S. dollar.”
So-called risk-on currencies—including energy-weighted currencies like the Canadian dollar, Brazilian real, or the ruble—tend to drop on events that highlight uncertainty or bearishness. But risk-off currencies—like the U.S. dollar, the yen and the Swiss franc—rise.
Trump winning could be compared to the U.K.’s Brexit referendum, which shocked markets but has taken time to reveal policy and trade implications.
“Maybe Brexit is at least the initial playbook,” Gannatti says. “On the one hand, you hear about all the stuff getting talked about, you hear how people feel about Trump, but it’s not a certainty that everything he talks about today becomes policy, and it certainly doesn’t become policy immediately.”
Gannatti notes how the Brexit vote helped send U.S. 10-year Treasuries to a low of 1.36% in July as investors sought safety.
“I would be surprised if the U.S. dollar traded more than a 3% or 4% gain,” adds James Dutkiewicz, chief investment strategist and senior portfolio manager for Sentry Investments, referring to an unlikely Trump victory. Such an event could push the Canadian dollar into the $1.35 to $1.40 range, he says (the loonie weakened this week to nearly $1.33, or US75.39 cents).
The Canadian dollar’s value will also depend on the price of oil. The U.S. dollar, Dutkiewicz says, would be influenced by other currencies including the yen, the euro and, to a lesser extent, the renminbi and sterling.
David Lafferty, chief market strategist for Natixis Global Asset Management, referred to the influence of the rock-bottom pound, which on Wednesday had fallen to 2008 financial crisis levels on coming “hard Brexit” talks. “[Lately] what you’ve seen isn’t so much strength in the [U.S.] dollar but weakness in the pound,” he says.
Also affecting currencies is how the election may change the outlook for the Fed, which has remained on the sidelines since last December. The meeting in November comes before the U.S. election, making policy action unlikely, but futures indicate a 66% probability of a rate hike in December.
Analysts view a Trump victory as negative for the economic outlook and a damper on the Fed’s prospects for tightening.
“The Fed becomes much more on hold if it’s Trump,” says Dutkiewicz. “They don’t want to tighten in December and then, six months later, [see that] Trump has caused negative economic activity because of trade policies. […] That minimizes, or tempers, how far the U.S. dollar can rally.”
Trump’s dwindling prospects have already led analysts to take a more bullish view of a Fed hike this year. Goldman Sachs said this week it was raising its odds of a rate hike from 65% to 75%.
Business as usual
If, as expected, Clinton wins, markets will see the outcome as business as usual, and make little (perhaps upside) change to their Fed outlook. Depending on what’s already priced into currencies ahead of the election, the U.S. dollar may move little under a Clinton victory.
“The market has priced in 25 basis points of tightening [by the Fed]. We’ve already seen a fairly big adjustment in the dollar, just in the last week or two, as the Fed governors appear to be continuing to talk up that December is certainly a reasonable possibility,” says Lafferty, who sees the loonie as undervalued.
Under a Clinton win, he adds: “Maybe the [U.S.] dollar has some strength at the margin, but I don’t think the dollar is going to take off.”