Whether markets have essentially priced in a Democratic presidential win is another question. The Invesco Solar ETF, which buys shares expected to gain from policy support for green energy, has already climbed 17% since the last presidential debate.
Another Dollar Bull Run For Trump?
When Trump was elected in 2016, the Bloomberg Dollar Spot Index surged 5% in two months.
Four years on, many analysts are expecting history to repeat itself, but have different rationales. UBS Wealth Management says a “red wave” could boost the greenback because of faster economic growth. Barclays says that will be due to haven demand from policy uncertainty.
Goldman projects that a Biden victory would weaken the dollar to 1.20-1.21 versus the euro whereas Trump would keep it at 1.18, roughly similar to the level now.
Not everyone agrees. At Wells Fargo, Jacobsen says the firm’s analysis found that higher Biden odds are actually associated with a stronger dollar, probably because of a larger spending package.
Still, exchange rates move for all sorts of macro reasons, including the U.S. yield gap with the rest of the developed world, which has been narrowing lately.
“You read all kinds of predictions being made, but what is clearly the most important driver of exchange rates is real interest rate differentials,” said Dirk Thiels, head of investment management at KBC Asset Management.
Global Shockwaves
U.S. policies will naturally spur profound consequences for the rest of the world.
Barclays’s dollar-neutral Biden basket bets on exchange rates linked to China and Europe and against the Russian ruble, Turkish lira, Canadian dollar and Mexican peso. That’s based on a mix of correlations and predictions around greater trade certainty and stronger political sanctions against countries like Russia. So far, the basket appears to be tracking the Democrat’s chances.
Whoever It Is, Reflation All The Way
Here’s another popular take: A landslide Democratic victory would usher in a massive stimulus package that will raise market-derived inflation expectations and steepen the yield curve.
Goldman predicts reflation under a Biden presidency would bring forward the next U.S. rate hike to 2023, instead of 2025 otherwise, and boost 10-year Treasury yields by 30 to 40 basis points in the month following the election.
Still, whoever wins, the U.S. is expected to loosen the fiscal taps to revive an economy battered by Covid-19. That’s why Alasdair McKinnon, lead manager of the Scottish Investment Trust, has made gold miners his biggest wager.
“At the very highest level they’re very similar: they both believe in increased spending and they both believe in the status quo,” he said from Edinburgh. “In that regard, they are both committed to a highly inflationary road map.”
--With assistance from Yakob Peterseil.
This article was provided by Bloomberg News.