jpm_asset_mgmt
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Global Liquidity
    • Multi-Asset Solutions

    Capabilities & Solutions

    • ETFs
    • Pension Strategy & Analytics
    • Global Insurance Solutions
    • Outsourced CIO
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • ETF Perspectives
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Sustainable Investing

    Retirement Insights

    • Retirement Insights Overview
    • Essential Elements of a Sound Retirement System
    • Building Better Retirement Portfolios
  • Resources
    • Center for Investment Excellence Podcasts
    • Insights App
    • Library
    • Multimedia
  • About us
  • Contact Us
Skip to main content
  • English
  • Role
  • Country
  • Client Reporting
Search
Menu
CLOSE
Search
  1. Home
  2. Insights
  3. Portfolio Insights
  4. Fixed Income Insights
  5. Global Fixed Income Blog
  6. 'Blue ripple' and the USD outlook

  • Share
  • LinkedIn Twitter Facebook Line
  • Print
  • Actions
  • LinkedIn Twitter Facebook Line
    Print

'Blue ripple' and the USD outlook

05/11/2020

Roger Hallam

The US Presidential Election has confounded pre-election polling once again. Biden’s recorded lead (as of Wednesday, November 4th) is much narrower than pre-election polls had suggested and while a Biden victory now seems likely, legal challenges in the days ahead will ensure an element of uncertainty persist for some time. The Senate race has also been a significant disappointment for the Democratic Party, as it appears they have not displaced sufficient sitting Senators to achieve a majority. The ‘Blue wave’ the market had prepared for now appears more of a ‘Blue ripple’ and global currency markets are adjusting to a different political outlook.

The consensus negative outlook for the US dollar under a ‘Blue wave’ was based on 2 key tenants 1) a less confrontational stance on trade between the US and its trading partners 2) large fiscal stimulus leading better global growth and a deterioration in the US twin fiscal and current account deficits. A ‘Blue ripple’ necessitates that expectations of significant fiscal stimulus in 2021 needs to be scaled back as a divided congress will likely struggle to pass fiscal stimulus much above USD1 trillion and this should lead the markets to discount a smaller deterioration in the US twin deficits. However, we differed from consensus in anticipating that after an initial drop, the US dollar would  gain support from higher bond yields and domestic growth under a ‘Blue wave’, which now appears to be less likely forthcoming, even while the medium term outlook for US currency fundamentals remains challenging.

A likely consequence of a Biden administration includes a more conventional approach with regards to policy changes in addition to a less antagonist relationship between the US and its trading partners. The latter would certainly be a net positive for higher-beta cyclical currencies versus the US dollar such as MXN, KRW and CNH in emerging markets and AUD in developed markets. All told, we see a Biden led administration governing alongside a Republican senate as a small net US dollar negative. But, the outlook for the US dollar will be buffeted by equally important Covid-19 pandemic and monetary policy cross-winds.

The path of the Covid-19 pandemic remains key for the market outlook for currencies, especially cyclical ones. Europe once again finds itself in the unfortunate position of being at the epicentre of the Covid-19 pandemic. High frequency indicators of economic activity have started to decline again as governments have put in place measures to attempt to curb infection rates. However, infection rates are also rising in the US as well and it will be difficult for the US to avoid some greater degree of mobility restrictions, similar to those put in place by Europe.

The ECB has already committed to easing monetary policy again at its December meeting, and will consider the use of all policy instruments. A rate cut would likely have the biggest impact on the Euro, although it is not our base that one is delivered in December. Nevertheless, it is clear that the ECB’s tolerance for further Euro strength is limited and that the EURUSD ‘strike price’ for a currency targeted rate cut continues to fall. Meanwhile, given the likelihood of smaller scale fiscal stimulus in the US in the months ahead, the possibility that the Federal Reserve announces an extension of the maturity of its QE purchases at its December meeting is rising. These cross currents likely keep EURUSD within established ranges over the remainder of the year.

Ultimately, the benefactors of the expected ‘Blue ripple’ scenario look set to be higher-beta cyclical currencies in emerging (e.g. MXN, KRW, CNH) and developed (e.g. AUD) markets.  These currencies should benefit the most from the reduction in trade uncertainties associated with a Biden administration, the additional stimulus expected from developed market central banks and their linkages to the Chinese economy where we expect strong growth to continue.


 

J.P. Morgan Asset Management does not predict outcomes of any political events, nor do we voice firm-wide opinions on any political candidates.

Market Views U.S. Elections Central Banks COVID-19 Currency

RELATED ARTICLES

Finding opportunities in the COVID recovery

While headline spreads have narrowed, investment grade credit continues to offer opportunities for active investors

Read more

Multiple reasons for multi-family

The agency CMBS market offers an attractive way for fixed income investors to access one of the more resilient sectors of the commercial real estate market.

Read more

5 Realistic Surprise Predictions for 2021

What does 2021 have in store for fixed income markets? Read on as Bob Michele shares 5 realistic predictions for the New Year; including inflation, Treasury yields, credit markets and bitcoin.

Read more
J.P. Morgan Asset Management

  • About us
  • Investment stewardship
  • Privacy policy
  • Cookie policy
  • Binding corporate rules
  • Sitemap
Opens LinkedIn site in new window
J.P. Morgan

  • J.P. Morgan
  • JPMorgan Chase
  • Chase

READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

The value of investments may go down as well as up and investors may not get back the full amount invested.

Copyright 2021 JPMorgan Chase & Co. All rights reserved.