"Hot politics" and "cold data" intertwine, is it time to short the US dollar?

Is the Dollar Turning Point Here?

Recently, Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, released a research report stating that as the Fed's rate cut approaches, the bearish sentiment towards the US dollar is rising, signaling the arrival of a time when other non-dollar currencies are shining.

According to FactSet data, as of this Monday, the US Dollar Index has fallen by 1.5% since July, now standing at 104.3.

Hayes also pointed out that currently, sentiment towards the US dollar has retreated from "excessively optimistic" levels.

On July 22nd, analysts Alex Cohen and Paul Ciana from Bank of America Merrill Lynch released a research report stating a bearish view on the dollar before the release of June US CPI data. Currently, the exchange rates of the Euro, Australian Dollar, and New Zealand Dollar against the US dollar have all shown significant upward trends.

A Series of Economic Data Showing Cooling Trends

Bank of America stated that recent US economic data has been poor, coupled with dovish Fed rhetoric, leading to market expectations of an early rate cut, with further depreciation of the dollar expected in the second half of the year.

Currently, a series of economic and inflation data are showing cooling trends:

CPI growth has slowed for two consecutive months, with core inflation excluding housing moving in a direction favorable to the Fed.

ISM services/manufacturing, durable goods orders, and retail sales are all showing a downward trend.

On Friday, the US will release the June PCE price index. Currently, economists widely predict that the year-on-year growth rate of the June PCE price index will decrease from 2.6% last month to 2.4%, indicating a continued cooling of inflation.

The market has almost fully priced in the Fed's rate cuts starting in September, with 2-3 rate cuts expected within the year.

The report states that if the Fed can implement rate cuts in the coming months against a backdrop of a slightly slowing but overall stable economy, it would have essentially achieved an "economic soft landing," boosting global risk appetite. The attractiveness of US Treasuries as a safe haven asset would also weaken, laying the foundation for a gradual depreciation of the US dollar.

The Forex Impact of the U.S. Election is Becoming Complex

According to previous media reports, Trump advocated a "weak dollar" policy to promote exports. With the current President Biden announcing his withdrawal from the race, the probability of Trump winning may increase, providing support for the expectation of a weaker dollar.

Bank of America stated in a report that the policy stance of the Republican government led by Trump was initially favorable to the dollar, but as time passed, the outlook became more chaotic.

This is mainly reflected in the following aspects:

The combination of low taxes and high tariffs is believed to stimulate inflation and interest rates, thereby enhancing the attractiveness of the dollar. However, it may also bring about global economic downturn risks, causing more widespread impacts on global assets.

Harsh crackdowns on illegal immigration may lead to imbalances in the labor market supply and demand, wage increases, and subsequently drive up inflation. However, it is expected that the U.S. population growth will slow down by then, offsetting this impact.

The prospect of substantial fiscal consolidation is limited and depends more on the structure and size of Congress.

Inflation risks arising from new policies may not lead to interest rate hikes, but may raise the neutral interest rate level.

However, the report also points out that the actual implementation strength or scope of the new government's policies may differ from expectations, increasing uncertainty in their impact.

The report also adds that if the Democratic Party, with Harris as the new candidate, wins, the dollar may remain unchanged, as there won't be significant changes in trade and immigration policies. However, short-term trading may lead to currency market fluctuations