While pre-election jitters could hurt USD, we expect a Hillary Clinton win in November and a Fed hike in December. We therefore expect some renewed USD strength in the next three to six months. Further out, however, the Fed’s data-dependent approach and a flatter UST yield curve should leave USD struggling to extend its gains. We subsequently lower our USD TWI forecast profile for H217.
Our near-term FX forecasts remain little changed for the next 3M-6M in that we continue to expect renewed albeit less pronounced USD outperformance across the board. This is based on the view that the Fed tightening cycle will resume in December. In addition, while uncertainty has grown ahead of the US presidential elections in November, we continue to see a Clinton win as likely and suspect that markets will interpret the outcome as reinstating the status quo and hence support USD.
Further out, we revise our USD forecasts to the downside to account for the prospect for only a slow and shallow Fed tightening cycle from here. This will continue to be reflected in a flatter UST yield curve. Indeed, we suspect that an aggressively re-steepening is less likely given concerns about lower natural rate in the US and the Fed’s data dependent stance. As a result, the upcoming Fed rate hikes should provide only temporary and (given the waning prospects for aggressive easing abroad) diminishing support for USD. This gives us an overall lower forecast profile for USD TWI over 12M and beyond compared to before.
*Credit Agricole forecasts last updated on eFXplus on Sep 28.
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