Currency traders are increasingly adopting hedging strategies to shield themselves from potential disruptions arising from the policies anticipated under a prospective Donald Trump presidency.
In the options market, there has been a noticeable surge in demand for insurance against fluctuations in the euro over the next year, a trend that gained momentum following Trump's victory in the Republican nomination in Iowa as we read in Bloomberg here.
Simultaneously, an indicator gauging market positioning and sentiment has tilted in favor of the dollar, considered the world's preferred safe-haven currency.
This shift in dynamics comes in the wake of a recent report in the Washington Post revealing Trump's private proposal of a flat 60% tariff on China if he secures the presidential election in November.
This echoes the trade and economic policies that reverberated through markets during his initial term in 2017. The market's focus appears to be transitioning from the interest rate trajectory of the Federal Reserve and the European Central Bank to concerns about emerging geopolitical tensions. Conflict in Ukraine and the potential for a broader confrontation in the Middle East.
ECB President Christine Lagarde expressed apprehension about a Trump presidency, emphasizing in a CNN interview that Europe needs to prepare for potential tariffs and "harsh decisions."
Another flight to safety could exacerbate pressure on the euro, which has declined by 2% this month, on track for its worst performance since September. Analysts attribute this decline to factors such as Trump's opposition to additional aid for Ukraine or the possibility of the U.S. withdrawing from NATO.
George Saravelos, Global Head of FX Research at Deutsche Bank, identifies the key driver behind a stronger dollar this year as the likely pricing of a higher safe-haven premium linked to the U.S. elections.
He predicts a fall in the euro against the dollar from its current value of around $1.08 to $1.05. While speculation about interest rate cuts by the Fed and ECB has historically influenced global markets, attention is now shifting towards a potential reiteration of Trump's foreign policy and trade priorities, which could significantly benefit the dollar, as we read in Blooerg.
During Trump's presidency, the S&P 500 Index experienced a notable rally, surging by over 60%, initially propelled by aggressive tax cuts and later by pandemic response measures.
However, the greenback faced fluctuations, hitting a three-year low amid geopolitical concerns, only to rebound to a record high in 2020. Despite past trends, there is no guarantee that history will repeat itself, emphasizing the rationale for acquiring volatility exposure.
Erik Nelson, Senior Macro Strategist at Wells Fargo, acknowledges the uncertainty, noting that if Trump advocates for pro-cyclical fiscal deficit expansion and appoints a more dovish successor for Powell, the conventional playbook for a Trump presidency might not yield dollar strength.
Nevertheless, Nelson underscores the nervousness in markets, particularly with concerns that Europe could become the target of tariff actions.
31.01.2024
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