The upcoming US elections are poised to generate significant market interest, with particular focus on the potential reactions of the US Dollar (USD). J.P. Morgan has provided insights into this dynamic landscape, estimating a 60-70% likelihood of a Trump victory. As the election date approaches, volatility in G10 currencies has surged, reaching unprecedented levels. Notably, the current election-induced volatility is observed to be 10-30% higher than what was experienced in both the 2016 and 2020 elections.
Potential USD Surge: The Impact of a Red Sweep
In scenarios where the Republicans secure a comprehensive victory, often referred to as a “Red Sweep,” the USD could potentially appreciate by 5%. Should Trump win the presidency but face a split Congress, the dollar might see a more modest rise of about 1.5-2%. Conversely, in the event of a Harris victory with a divided Congress, the USD is expected to weaken. These projections underscore J.P. Morgan’s belief that the current market positioning could facilitate USD appreciation, even in a Harris win scenario.
Interestingly, J.P. Morgan has indicated a cautious approach by maintaining light positions in emerging market currencies. Following a potential Trump victory, they anticipate a rise in USD value accompanied by increased volatility.
Divergent Market Dynamics: A Shift from 2016
J.P. Morgan highlights that the market’s current setup is markedly different from the 2016 election cycle. Despite the odds of a Trump victory on November 5th lengthening slightly in recent days, investors seem to expect a similar market response to that of 2016. Currently, the 10-year yield stands at 4.29%, nearing three-month highs. This uptick is partially attributed to the inflationary pressures associated with the ‘Trump-trade,’ which have been partially factored into the market. It’s noteworthy that investors today hold a much larger equity position compared to their portfolios eight years ago.
Exploring the Implications of a Harris Victory
In the event of a Harris victory, J.P. Morgan foresees increased uncertainty regarding the trajectory of corporate taxes in the near term. However, the prospect of reduced tariff risks in such a scenario could provide a supportive backdrop for equity performance. These insights from J.P. Morgan underline the complexities and varied potential outcomes of the upcoming elections, emphasizing the importance of strategic market positioning.
