As the U.S. elections approach, more forex investors are steering clear of the U.S. dollar. According to Elsa Lignos, Global Head of FX Strategy at RBC Capital Markets, investors are increasingly shifting towards cross currencies due to election uncertainties, making it hard to predict and adjust positions. Typically, the forex market follows the dollar closely, with the USD constituting 88% of all transactions in the $7.5 trillion daily forex market. However, the debate among Federal Reserve officials on the pace of rate cuts and the approaching election make USD trades risky for some.
Data from State Street Global shows long-term investors hold the most neutral USD positions in two and a half years. Institutions like Wells Fargo, RBC, Allspring Global Investments, and State Street Global are delaying significant bets on the dollar until later this year due to political uncertainties. While speculative market participants, including hedge funds, increased bets on the dollar last week, their positions are not as extreme as earlier this month.
Instead, the market is focusing on cross-currency pairs, excluding the dollar. RBC recommends shorting CHF against JPY, while Allspring is betting the EUR will fall against NOK. Lauren van Biljon, Head of Rates and FX at Allspring Global Fixed Income Team, mentioned that the EUR should weaken, with the USD being harder to trade due to political events.
State Street Global’s fund managers are also waiting until after the November election to prepare for a potential USD decline. Portfolio manager Aaron Hurd suggested overcoming economic uncertainties and seeing election outcomes could clarify the scenario, leading to a significant drop in the dollar.
The slim lead of U.S. Vice President Kamala Harris over Donald Trump in polls has diminished confidence that the upcoming election will boost the dollar. Markets historically perceive a Trump win as favorable for the dollar. JPMorgan and Nomura noted uncertainties around Federal Reserve policies are also affecting the USD's trajectory.
Since early August, the Bloomberg Dollar Index has dropped by approximately 3%, coinciding with one of the lowest nonfarm payroll levels since the pandemic, setting the stage for the Fed to start rate cuts in September. Markets are eagerly awaiting more employment data this Friday for signs of another 50 basis points cut by the Fed in November. JPMorgan strategists, led by Meera Chandan, plan to maintain a "light and net neutral" USD exposure until more U.S. labor market data clarifies rate trends.
Nomura expects GBP and AUD to rise against NZD rather than USD, owing to high market expectations on Fed's easing policies. Dominic Bunning, Head of G10 FX Strategy at Nomura, mentioned the U.S. data isn't poor, making it challenging to foresee a major USD decline against other G10 currencies. He also noted the approaching election adds to market volatility risks.
Brad Bechtel, Global Head of FX at Jefferies, indicated that election risk positions would increase in October and suggested buying USD against MXN as a way to engage in the so-called Trump trade. However, traders might still avoid USD aside from these bets.
Some market participants believe Trump’s win could lead to more trade friction with partners. Wells Fargo noted that to evade election risks, investors might choose macro trades like shorting CHF against JPY. This weakens the outlook of Global Macro Strategist Aroop Chatterjee on the USD rising in the coming months. Chatterjee expressed lower confidence in the USD due to election results, particularly impacting the outlook for late this year and early 2025.
