The first presidential debate is slated for Thursday. And that could be the earnest start of election year volatility affecting risk assets. Some believe the U.S. dollar could be a winning trade in the months leading up to Election Day. Should the greenback extend its already impressive pace, investors that want to remain engaged with international equities could find benefit in currency hedged exchange traded funds, including the WisdomTree Europe Hedged Equity Fund (HEDJ ) and the WisdomTree Japan Hedged Equity ETF (DXJ ).
Entering Monday, the Deutsche Bank Long USD Currency Portfolio Index, which tracks the dollar against a basket of major currencies, was higher by 7.4% year-to-date. That bullishness is supporting gains for DXJ and HEDJ. That helps the ETFs rank as among the best performers in the Japan and Europe categories since the start of the year. More the same could be on the way if the U.S. currency rallies amid expectations of election year turbulence.
Debate Could Propel Dollar, Currency Hedged ETFs
In a new report, Goldman Sachs analyst Dominic Wilson said the dollar could be a valid near-term play. Thursday’s presidential debate could act as a potential catalyst for the greenback.
“The upcoming presidential debate could usher in at least a temporary period of focus on the U.S. election. And in that context, we continue to like exposure to medium-term USD upside. Which also has the benefit of hedging some non-U.S. political risks (like the French election and China slowdown),” observed the analyst.
Wilson examined various scenarios for the dollar against major currencies following the election. He noted that under a Republican sweep, both the euro and yen would likely decline materially against the dollar. That could potentially spark HEDJ and DXJ. He added that should former President Trump win with a divided Congress, those currencies would still likely falter against the dollar. Though, less than under the GOP sweep scenario.
The Goldman Sachs analyst added that under a Democrat sweep situation, the euro and yen could post modest against the dollar. And if President Biden is reelected but must deal with a split Congress, gains for those currencies could be somewhat higher. However, there could be near-term merit in considering DXK and HEDJ.
“Although traditionally markets have often reacted to the U.S. election only 1-2 months ahead of the event. We have also seen meaningful shifts in election probabilities — and markets — around presidential debates,” concludes Wilson. “The much earlier debate calendar increases the chances that the market impact appears earlier than usual, creating a case for setting some election hedges already.”
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