US Dollar: Fed risks and election scenarios – TD Securities

TD Securities’ macro team, led by Jayati Bharadwaj, Howard Du and Linda Cheng, maintains a bearish view on the Dollar despite a hawkish market reaction to Chair Warsh’s Jackson Hole speech. They argue incoming US data still point to a September Fed hold, with the broader USD trend seen weaker into year-end as US midterm election scenarios and macro fundamentals drive FX.

Fed path and midterm scenarios

"We maintain a bearish USD bias as incoming data should steer the Fed toward a September rate hold decision. We like fading any USD rallies against SEK and AUD in G10 and against MXN and ZAR in EM."

"Words alone are unlikely to be enough to shift the broader FX narrative. A durable USD rebound will require more convincing policy follow-through and renewed upside surprises in US data. In the absence of new shocks, incoming data should steer the Fed toward a near-term rate hold rather than a rate hike."

"Market attention should gradually shift toward the US midterm election after Labor Day. The USD should trade moderately weaker to neutral on gridlock, but a "Blue Wave" could lead to some material knee-jerk USD strength."

"Our baseline forecast expects the USD to modestly weaken into year-end as macro drivers alleviate bullish USD pressures. A "Blue Wave" scenario on the other hand could lead to more knee-jerk USD strength as the US regains some institutional credibility and long-dated Treasury term premium falls."

"To the contrary, the scenario of Republicans maintaining full Congress control would be the most bearish for the USD. We like lower USD/SEK in the case of a divided Congress on seasonality, FX valuation, and 2018 analog; own USD/CNH in case of "Blue Wave" risk scenario."