American elections: the dollar facing the risk of a “democratic wave”

Posted on Oct 12, 2020 at 9:43 amUpdated Oct 12, 2020 3:57 PM

The markets are crushing the dollar. Their pessimism regarding the greenback has reached a high for almost 3 years, as evidenced by the accumulation of speculative downward positions in the US currency. Hedge funds are particularly negative on the outlook for the world’s largest currency. The dollar loses 3.4% this year while the election years are generally favorable to it. The greenback progresses nearly two out of three years when it is necessary to renew the tenant of the White House. The probability of a Democratic victory increases and this assumption is the most negative for the American currency according to the markets.

Worry about the risk of imbroglio on D-day

In the event of a “blue wave” (the color of the Democrats), a victory for Joe Biden and a Democratic majority in the Senate (the presidential election is coupled with that of 35 senators and the House of Representatives), the euro and the renminbi would gain 0.45% against the dollar within 24 hours of the results, according to the Bank Nomura poll.

A “red wave” (the Republicans’ color) would lower the euro by 0.2% against the dollar, and the greenback would gain 0.5% against the Chinese currency. If the winner of the presidential election cannot be chosen on D-Day (too tight ballot), the dollar would modestly benefit from this status quo: slight fall in the euro and stability against the Chinese currency. It is especially Wall Street who would worry about this scenario of imbroglio, which would recall the election of 2000. American stocks would fall by 3.4% in one day according to the professionals questioned.

Focus on recovery

“Donald Trump’s trade policy is much more aggressive (tariffs) than that envisioned by Joe Biden. The election of the Democrat would create less turbulence in world trade and would boost the currencies of the trading partners of the United States, Europe, Japan and certain emerging countries. Domestically, the Democrat wants to increase spending (infrastructure) and increase deficits, which will also lower the dollar ”, says Jeremy Hale, G10 currency strategist at Citi.

A Biden administration will want to prioritize the resumption of activity by postponing its tax hikes. She will live with a weak dollar. The further it goes, the more foreigners can buy American assets (stocks, bonds) and make direct investments in the country. However, lacking savings to finance the revival of its activity, the United States needs abundant and regular foreign capital.

“Even if there are differences between the two programs, there is a high probability of a new fiscal and monetary support plan in the United States in the first half of next year”, says Stephen Jen, strategist at Eurizon SLJ Capital. However, he said, we should not darken the picture by evoking a collapse of the currency of the world’s largest economy and a “Monetary civil war”. “Writing the dollar epitaph today is as irrelevant as it was in the 1960s when social unrest hit this country so hard”.

The predictable “largesse” of the Biden administration will drive up debt and deficits and undermine the greenback initially. But they will also have a positive impact, ultimately, on the dollar if they succeed in increasing the potential growth rate. The American economy would recover for a long time faster and stronger than the rest of the world, attracting capital from around the world like a magnet.

Long term trends

The dollar falls on average 5% in the 5 days before the US presidential election, according to the hedge fund Winton. Whoever wins, Democrat or Republican, he regains all the ground lost in the next 20 sessions and 3% in the 100 days. Gold drops 8% in the month following the election. This safe haven against uncertainties gives way once the result is known. The Dow Jones index gained nearly 5% in the 20 sessions after the election. Markets prefer continuity. Wall Street wins 15.3% in the year of the election if the ruling party maintains a candidate of its obedience to the White House (second term or victory of a candidate of the same party). US stocks lose 4.4% in the event of a political alternation. They have seen their value triple under the presidencies of Roosevelt and Clinton, and decline under Reagan and GW Bush, who are Wall Street’s preferred candidates.

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