Citi predicts dollar will jump 5% if Trumps wins election

London — Analysts at investment bank Citi have predicted a 5% jump in the dollar and a selloff in bond markets if a Donald Trump-led Republican Party clean sweeps the US election in November.

Their estimate was predicated partly on the fact the dollar rallied about 5% after Trump’s surprise election win in 2016, but also lost about 5% ahead of the 2020 vote when Trump lost out to current Democratic president Joe Biden.

“We suspect +5% is the right amount of potential dollar strength to attribute to a Trump victory with a red wave,” the bank’s analysts said, referring to if Trump wins the White House and Republicans win both chambers of Congress. Trump is the likely Republican nominee for the November 5 election.

The analysts also predicted a similar pattern to 2020 when the greenback had completed most of its move by election night due to the way markets traditionally pre-empt outcomes.

“Therefore, we would expect the high in the dollar — potentially for the year — could very well be seen right around the election,” they said.

A Republican sweep would also have the biggest impact on bond markets as it would likely result in new tax cuts, stimulus and trade tariffs on rivals like China.

‘Steeper yield curve’

That could lead to “higher rates and a steeper yield curve and higher term premium”, Citi said, likening it to the bond market selloff in October when markets were also worrying about the rise in US debt.

“Long forward vol[alitity] on long-dated forward rates can be a carry friendly hedge for a Republican-sweep scenario, given that the long-dated vol has been trading directionally with the forward rates,” the bank’s analysts said.

Wall Street’s election focus, meanwhile, is likely to be what happens to taxes.

Citi’s assumption is that Trump would prioritise extending the current income tax regime as well as potentially layering on further corporate tax cuts.

They estimated, however, that a “clean extension” of cuts currently due to expire would add more than $3-trillion to the US government’s deficit over the next 10 years.

“There is a question as to whether the Republicans will be comfortable adding trillions to the deficit under their control, particularly considering a one-term president,” Citi said, adding that while Biden might also extend tax cuts, he may also raise some corporate taxes.

Reuters