To be sure, tariffs play a central role in foreign exchange markets and Goldman says they can remain in the spotlight under different election scenarios.
Specifically, the dollar would most likely react to a Republican sweep with its most forceful push, which will pave the way for bigger tariff increases as well as domestic tax cuts. A divided Republican government would set off only a smaller and narrower dollar rally.
Meanwhile, a Democratic sweep or divided Democratic government “would likely result in some initial Dollar downside as markets reprice the prospect of more dramatic changes in tariffs,” strategists said.
They believe that those currencies sensitive to China and policy changes – such as the Mexican Peso (MXN), Chinese Yuan (CNH), South Korean Won (KRW), Euro (EUR), and Australian Dollar (AUD) – would feel some relief after recent market moves.
According to research by the firm, the Chinese Yuan is likely to drop to about 7.40 under a baseline scenario of increased US tariffs on China with a Republican government, while the Euro will be expected to decline by approximately 3% or even up to 10% in case of a global baseline tariff with corresponding tax cuts.
The outlook by Japanese Yen/US dollar is somewhat ambiguous with conflicting factors and thus is a less favored currency pair by Goldman Sachs for this task at hand.
“Fundamental analysis generally points to smaller FX impacts than event studies or policy-focused analysis, so we think investors should treat estimates based on the 2018-19 experience with care. And we think markets will not fully reflect our tariff expectations immediately,” the Goldman team said in a note.
“Which is why we favor longer-dated trade expressions in Republican outcomes than Democratic ones,” they added.
Goldman emphasizes the point that US policies are only one of the critical drivers of the FX outlook.
The bank feels there is upside risk to their call for a softish Dollar that depreciates gradually from its peak in 2022 due to the persistent “US exceptionalism.” It further pointed out downside risks if China’s stimulus actually does some bigger-than-expected rebalancing of the growth charts.
