Research Team at Natixis, notes that since the start of October, the turn of events has accelerated, with as corollary the recovery of the US dollar against most currencies.
“We are referring to Donald Trump’s dip in the opinion polls, the stronger likelihood of a hard Brexit, sterling’s flash crash, the renewed steepening of yield curves on account of the more substantial inflation premiums, the weakness of the Chinese yuan and, especially, the prospect of a hike in the Fed Funds rate in December.
All these factors can be expected to bolster the US dollar over the short to medium term. Our view is that the Federal Reserve will raise the Fed Funds rate in December and that the tempo of the monetary tightening will accelerate in 2017 (three hikes, not currently priced in by the market) in reaction to inflation recovering back above 2% (spurred by base effects for energy prices and by higher earnings). The US elections will have a major bearing on the US dollar’s performance right up to 8 November, especially if Donald Trump’s standing in the opinion polls improves. Our forecasts, based on the different possible outcomes of the US elections, are set out in a special report, “Impact of US elections on foreign exchange market”.”