As the United States braces for its upcoming election, financial markets are attentively watching the potential impacts on the USD. According to predictions by J.P. Morgan, there is an estimated 60-70% chance of a Trump victory, which could significantly influence currency markets. The anticipation surrounding the elections has already spurred increased volatility in G10 currencies, reaching unprecedented levels. This current election-related turbulence is reported to be 10-30% higher than during the 2016 and 2020 elections.
USD Could Climb by 5% with a Republican Sweep
In scenarios where a Republican victory occurs across the board, the USD could surge by as much as 5%. On the other hand, even if Trump wins but Congress remains divided, the dollar might still appreciate by about 1.5-2%. Conversely, should Harris emerge victorious with a split Congress, J.P. Morgan projects a weakening of the USD. Despite these potential outcomes, it is believed that the current market positioning may not impede the dollar’s rise and could even provide support if Harris secures the presidency.
Interestingly, J.P. Morgan has decided to keep their positions in emerging market currencies relatively light. They anticipate that a Trump win could trigger a rise in the USD and heightened market volatility, underscoring the need for strategic positioning in the aftermath of the election.
Divergent Market Dynamics Compared to 2016
J.P. Morgan emphasizes that the current market setup diverges noticeably from 2016. Although the odds of a Donald Trump victory have slightly decreased as the election day approaches, investors continue to expect that a Republican win might elicit market movements reminiscent of the 2016 election. Currently, the 10-year yield stands at 4.29%, nearing its three-month high, partially influenced by the inflationary “Trump-trade” expectations that have been somewhat factored into the market.
Additionally, it is noted that investors are holding significantly more equities compared to their positions eight years ago, indicating a shift in market dynamics and investor sentiment.
Potential Market Implications if Harris Wins
In the event of a Harris win, J.P. Morgan highlights that there could be an increase in uncertainty regarding the trajectory of corporate taxes in the near term. However, over a longer period, reduced tariff risks might support equity performance, offering some relief amid potential policy shifts. This scenario underscores the complexity and multifaceted nature of the potential market responses to varying election outcomes.
