In the past few weeks, US equities have shown some signs of ‘fatigue’ amid rising uncertainty over US elections and the lack of stimulus from both the Fed and the government. Most of the rise in risky assets such as equities in the past few months has been mainly attributed to the massive liquidity injections from major institutions to avoid economies from falling into a deflationary depression.
It is interesting to see that in the past year, a cheaper US Dollar has been mainly associated with stronger US equities, especially since the pandemic (figure 1). Hence, the ‘close elections’ may certainly lead to a choppy equity market in the last quarter of 2020 and therefore should result in a strong demand for safe assets such as the USD. We think that going long the Dollar could offer a good hedge against a new round of equity selloff in the coming weeks.
Source: Eikon Reuters
In addition, long the USD remains a contrarian trade as the ‘short Dollar trade’ is still very crowded (figure 1). We are confident that the US Dollar will remain strong if price volatility rises in the near term, especially against risk-on currencies such as the British pound or the Australian Dollar.