J.P.Morgan: Elections & Mapping Transmission From Potential Policies To USD

J.P.Morgan write “risks to the USD are skewed bullishly heading into ’24 elections if current polling stays intact.”

• They believe that “US political risk premia for FX next year should be concentrated around risks of new tariffs; we estimate 4-6% USD appreciation if universal 10% tariffs were to be introduced. Broadening of US-China strategic competition is also USD-positive through growth channels.”
• “Tariff risk could also support CHF. G10 high-beta FX is at risk from any negative spillovers to global growth, though it is already somewhat cheap. CNY should still net weaken in the event additional tariffs are imposed, but the setup is different now vs 2018. Beyond CNY, an objective screening highlights EUR, MXN, and select EM Asia.”
• “Fiscal policy has been a meaningful support for USD across the last two administrations, but we see less scope for transformative policy impacting the USD this cycle. Medium-term risks around the deficit will persist for USD, though a reversion lower is not necessarily imminent.”
• “There is just boilerplate event-risk pricing in FX options. Like 2020, pricing is less concentrated in Asia; MXN vol packs the most election premia currently. Calendar structures that sell pre- and buy post-election options are the traditional go-to type of structures for liquid exposure to election vol. EUR, CNH, and TWD screen favourably.”