perspectives d’investissement

    A Democratic sweep could sweep USDCNY off its feet

    A Democratic sweep could sweep USDCNY off its feet
    Vasileios Gkionakis, PhD - Responsable de la stratégie FX globale

    Vasileios Gkionakis, PhD

    Responsable de la stratégie FX globale
    Kiran Kowshik - Stratège marchés des changes

    Kiran Kowshik

    Stratège marchés des changes
    Homin Lee - Stratège macro senior

    Homin Lee

    Stratège macro senior
    Sophie Chardon - Stratège cross-asset

    Sophie Chardon

    Stratège cross-asset

    Key highlights

    • The dollar has recently pared back most of its September gains. Depreciation likely to continue, but with more “two-way” price action
    • We keep our euro-dollar forecast at 1.21 by year-end
    • Euro/Swiss franc should gradually gain, as Swiss outflows pick up
    • Odds of a Brexit deal have increased, and sterling-dollar is poised for a rebound towards 1.35
    • We continue to expect gradual strength for the Japanese yen
    • We maintain our forecasts for dollar-yuan downside, but would view a Biden presidency as bullish for the Chinese currency.

    The US dollar has by now given back most of its gains from September’s “mini” rally. This reflects still-weak momentum dynamics, fundamental dollar headwinds, and low market appetite for chasing the greenback higher. We maintain the view of further dollar downside based on 1) the Federal Reserve (Fed)'s ultra-accommodative long-term stance, 2) negative US real yields, 3) a still-material dollar overvaluation, and 4) our base scenario of a Democratic sweep in the US elections. This last factor would likely lead the market to price in the reversal of the corporate rate tax cut.

    That said, risk events and challenges do exist, including Brexit progress, uncertainty on the US election outcome, and developments on the pandemic front. This suggests that pace of USD depreciation has entered its second phase that will be slower and subject to more “two-way” price action.

    The pace of dollar depreciation has entered its second, slower phase

    We keep our target of 1.21 for the euro/US dollar (EURUSD) by year-end, and see some further modest gains in 2021. At the same time, we expect euro/Swiss franc to gravitate somewhat higher, especially since recent balance-of-payments data suggests a pick-up in Swiss outflows.

    Turning to sterling, we believe that the time is ripe to turn constructive again. Despite political posturing, the two sides have made some progress and should become more pragmatic as time runs out. With sterling still undervalued and speculative positioning very clean, we think the currency is set for a hefty rebound towards 1.35. As for the Japanese yen, we still expect a gradual appreciation, which however now runs the risk of being slower given USDJPY’s ongoing decoupling from yield differentials.

    We maintain our bearish USDCNY view, forecasting 6.75 and 6.68 on three- and twelve-month views, but risks remain to the downside. Improving growth, a less dovish PBOC, and sharply improving balance-of-payments dynamics support our more constructive view. While we assume a Biden win in the US presidential elections, we are not betting it would mean an automatic or rapid reduction in Section 301 tariffs on China goods. Still, a reduction is plausible, and would introduce substantial downside risks to our current forecasts.

    A Biden win would not mean an automatic reduction in tariffs on China goods

    In emerging markets (EM), we remain structurally neutral on the overall GBIEMFX index ahead of the US elections. While a Democratic sweep could result in reduced trade tensions that support large parts of emerging markets, increased fiscal spending and a potentially steeper US Treasury curve could actually first hurt some of the yield-sensitive, current account-deficit EM currencies.

    Main risks to our views: First, a second strong Covid-19 wave that again significantly disrupts economic activity, reduces liquidity and increases demand for dollars. Second, the euro appreciation may have become an unwelcome consequence for the European Central Bank. Although the room for policy action is far more limited than in the past, any verbal intervention is likely to weigh somewhat on the common currency and act as a brake. Third, a Trump victory in the US elections would suggest a return of global trade frictions and increased demand for dollars.

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