US Growth and Elections Drive Currency Markets

Strong growth and upcoming election risk drove US yields and the US dollar significantly higher in October. Tactically, we are now neutral on EUR, JPY, CHF and negative on AUD.

The risk posed by US election is likely to have a major impact on currency markets over the next 1–3 months, reducing our conviction in our short-term views. In the event of a Trump win, we expect higher US interest rates and a stronger US dollar relative to a Harris win. This is largely due to concerns over greater fiscal spending and high tariffs detailed in Trump’s platform, with the largest impact occurring if Trump wins and the Republicans win both the House and Senate. A Harris/Democratic Party sweep appears highly unlikely. However, if it happens, we’d expect a smaller fiscal stimulus with a bias toward higher corporate taxes and greater regulation—or at least not a reduction in regulation. We advise investors to focus on a 4–6-month view, paying most attention to the likelihood of actual policy measures once the new government takes office, but those will only gradually become clear after the election.

The election outcome will undoubtedly shift our views. However, we continue to see relative growth as a key driver for currency markets, as was evident in October. With the broad resurgence of US growth and upside surprises in US inflation, we are moderating our outlook for an uncomfortably soft landing in the US While we still anticipate US growth to slow gradually—along with lower rates—recent data indicates that this slowdown will be more gradual, allowing the US growth advantage over the rest of the G10 to persist for longer. This outlook biases the dollar higher, though much of this has already been priced in over the past six weeks.

Outside the US, growth remains significantly softer, with challenges such as greater fiscal consolidation, more rapid monetary easing, and higher exposure to China's weak growth outlook likely to weigh on most currencies relative to the US dollar. Above-target inflation and more resilient growth should help support the British pound and Australian dollar. In contrast, we see limited upside for the euro, krona, and franc due to factors such as the potential for steadier ECB rate cuts, a persistent recession in Sweden, and the risk of Swiss policy rates returning to zero or even below.

US Dollar (USD)

Relative to our view over the past two months, we now think that the US dollar will remain higher for longer. The transition from a bull market to a bear market has been bumpy, and dollar strength looks set to extend for a longer period as the US economy refuses to slow down. Tariff and fiscal risks, should Trump win, may prolong US dollar strength even if the US economy begins to slow again. As a result, we are positively shifting our view on the dollar.

Last month, we suggested that the US dollar should rebound from Q3 weakness, but that investors should sell rallies based on a weaker labor market and the start of the Federal Reserve (Fed) rate-cutting cycle. Now, despite the dollar’s rally, we are backing away from our recommendation to sell that rally due to the material positive shift in the fundamentals underpinning this dollar rebound. To sell dollars, we need clarity on the policies of the new US government and clearer signs that US growth is slowing, at least back to the long-run trend. We expect these conditions to materialize over the course of 2025, but it may take longer, and the dollar may climb higher than previously expected.

In the long term, our views have not changed. We have long held the view that the US dollar is likely to fall by at least 10–15% over the coming years as US yields and growth fall back toward the G10 average, and the US grapples with high fiscal and current account deficits. For investors with a horizon over two years, we strongly recommend short US dollar positions..

Canadian Dollar (CAD)

Our tactical view on the Canadian dollar remains mildly positive, though it largely sits within a neutral range. While the signal lags those for the US dollar and Japanese yen, the Canadian dollar is showing relative strength against other G10 currencies. Current growth indicators are weak, and the monetary outlook remains dovish, suggesting potential downside. However, this is offset by an improved 2025 outlook, as monetary easing is expected to support a recovery in growth.
The Bank of Canada (BoC), having implemented rate cuts earlier and at a faster pace than most other central banks, is likely to see the benefits of those cuts sooner. Additionally, the positive shift in our US dollar outlook and the overly pessimistic investor positioning on the Canadian dollar should help support the currency on non-USD crosses over the next several months.

Against the US dollar, we see USD/CAD biased to the upside, potentially above 1.40. However, a Harris victory could trigger a short-term rally in the Canadian dollar.

Euro (EUR)

We remain modestly negative—though near neutral—on the euro over the next one to two months. Strong labor markets and the upside surprise in Q3 growth will likely prevent the ECB from implementing a 0.5% rate cut in December. However, a steady pace of 0.25% cuts at each meeting seems probable as inflation gradually normalizes and near-term growth risks remain tilted to the downside.

Longer-term concerns, including high debt levels and low potential growth, continue to weigh on the euro’s outlook. These issues are exacerbated by increasing political uncertainty in France and Germany. The rising likelihood of an early German election in 2025, coupled with the risks of a Trump victory, may further direct investor attention to these structural growth challenges. While a Harris victory could offer some relief, any rebound in the euro would likely be limited, given the stronger US growth prospects and yields.

Additionally, our long-term fair value model suggests that the euro is overvalued against most G10 currencies, with the exception of the US dollar and Swiss franc.

British Pound (GBP)

We maintain a negative tactical view on the pound due to weakness in our economic factor model and poor relative local equity market returns. The pound’s strong performance this year, combined with a deceleration in economic data—especially relative to expectations—suggests that much of the good news is already priced in. While absolute growth levels are adequate, they remain lackluster and could suffer further if a Trump victory in the US election leads to the imposition of tariffs.

The autumn budget is expected to provide some support, potentially limiting growth downside and slowing the pace of disinflation, though only marginally. However, higher business taxes aimed at financing the NHS may weigh on hiring and investment, further dampening the outlook. Consequently, we see a bias toward larger-than-expected rate cuts from the Bank of England and a downside skew for the pound.

Our long-term valuation model offers a more positive outlook for the pound, as it screens as undervalued relative to fair value. However, sticky inflation and persistently weak potential growth post-Brexit are likely to weigh on fair value, limiting the currency’s upside potential over the next several years.

Japanese Yen (JPY)

We maintain a positive outlook on the yen, though less so against the US dollar. A USD/JPY range of 145–155 appears likely for the remainder of the year, driven by rising US rates and growth. Movement within that range will likely depend heavily on the outcome of the US election. Beyond this year, we anticipate further yen strength, with USD/JPY moving toward 135 by the end of 2025. This aligns with expectations of a 25–50 bp increase in Japanese policy rates and approximately 150 bp in Fed rate cuts through next year.

While the Bank of Japan (BoJ) may delay rate hikes due to political uncertainty, a likely increase in fiscal stimulus from the new government strengthens the case for eventual monetary tightening. This outlook assumes a soft-landing scenario. Should recession risks escalate, the yen could easily strengthen further, trading into the 120s against the dollar and posting even larger gains against higher-beta, commodity-sensitive currencies.

The primary risk to this view is a broad reacceleration in US and global growth and inflation, which could halt or reverse the ongoing global monetary easing trend.

Swiss Franc (CHF)

Our models have shifted to a negative tactical outlook on the franc, though it may experience some upside from safe-haven flows in the event of a Trump victory or further escalation between Iran and Israel. Otherwise, the franc remains the most overvalued G10 currency according to our long-term fair value estimates, has the second-lowest yields in the G10 (potentially the lowest by June 2025), and core inflation is the weakest in the G10.

Despite these weak fundamentals, the real trade-weighted franc is near the upper end of its 30-year range. We anticipate that the Swiss National Bank (SNB) will become more inclined toward direct intervention to weaken the franc once the policy rate falls to 0.50%. Given that a significant part of the inflation undershoot is directly tied to franc strength via import prices, we believe it is sensible for the SNB to shift its focus from rate cuts to a policy explicitly targeting a weaker franc.

Overall, we view the franc as transitioning toward a prolonged reversion downward, aligning more closely with our estimate of its long-term fair value.

Norwegian Krone (NOK)

Our tactical model signals remain negative on the krone, driven by weak local equity market performance and a negative growth signal. On a more positive note, the krone is historically undervalued relative to our estimates of fair value and benefits from steady long-term potential growth and a strong balance sheet.

In the near term, however, we expect the krone to remain volatile as political risks increase, oil markets face challenges from the potential for increased OPEC+ production and Israel-Iran tensions, and global risk sentiment fluctuates amid ongoing geopolitical uncertainty.

Swedish Krona (SEK)

Our tactical krona signal remains neutral. Weak equity markets and the rapid easing of monetary policy point to further downside for the currency. Potential volatility in equity markets following the US election may also contribute to downside pressure.

We identified weak economic data as a core reason for the currency’s weakness in October. However, looking ahead, we are more optimistic. Consensus expectations for an economic recovery in 2025, partly driven by the aggressive easing from the Riksbank, provide a more solid outlook for next year. The currency is very cheap relative to long-run fair value and is cyclically depressed. Once growth begins to improve and global yields move lower, as the Fed and other central banks ramp up monetary easing, the krona has significant room to recover. This more optimistic medium-term outlook offsets the near-term risks, resulting in a neutral tactical model signal.

Australian Dollar (AUD)

Our tactical models remain neutral on the Australian dollar. The currency is highly sensitive to the outcome of the US election, given the importance of trade with China and the potential for significant US tariffs on China if Trump wins. On the other hand, there seems to be a Trump risk premium priced into the Australian dollar, and it could rebound if Harris wins.

While few details have been released on Chinese fiscal stimulus, most indications suggest it will focus on relieving local government debt and bank recapitalization. These measures are needed but will do little to boost demand for Australian exports. The Reserve Bank of Australia (RBA) is holding rates steady, but with inflation moderating, the RBA may shift toward an easing stance in Q1, which could weigh on the Australian dollar. However, our economic signals point to stable growth, and consensus expectations call for a rebound in 2025—both of which support the Australian dollar strength. Overall, the view is balanced for the next few months.

In the long term, the outlook for the Australian dollar is mixed. It is cheap relative to the US dollar, British pound, euro, and Swiss franc, with room to appreciate, but it is expensive against the yen and Scandinavian currencies.

New Zealand Dollar (NZD)

Our tactical model remains negative on the New Zealand dollar, ranking it as the weakest in the G10. The advantage of New Zealand’s high yields is rapidly diminishing as the Reserve Bank of New Zealand (RBNZ) eases policy in response to disinflation and near-recessionary conditions. While current short-term yields remain high, any benefit is fully offset by ongoing growth challenges and a weak external balance, with the current account at -6.7% of GDP. Heightened geopolitical risks related to the US election also pose additional headwinds for the New Zealand dollar.

We believe the RBNZ’s rate cuts are necessary and beneficial, but the positive effects will take time to materialize. Until then, the New Zealand dollar outlook is likely to remain challenging.

In the long term, our outlook is mixed. Our estimates of long-run fair value suggest that the New Zealand dollar is undervalued relative to the US dollar and Swiss franc, with ample room to appreciate. However, it remains expensive against the yen and Scandinavian currencies.