Foreign exchange market analysis shows that the United States dollar can actually be tied to the presidential elections far more than previously anticipated.
Canadian investment bank, TD Securities, has released a new report stating that the USD performance is closely following the results of the presidential election. Mark McCormick, Global Head of FX Strategy at TD Securities has come out stating that there are clear links between the USD performance and the expectations concerning the upcoming election. The study goes into detail describing how the correlation between the USD and election outcome odds has increased from around 20% in March to almost 80% at the time of writing this article.
USD and Elections
It is obvious that the national currency would react to the elections. This is due to the fact that the current President of the United States, Donald Trump, has had a huge impact on global markets, growth, global trade policies, and geopolitical uncertainty. This is caused by the turbulent personality that the POTUS represents. If Joe Biden wins the elections it would directly undermine #MAGA trade tenants. The victory of democratic candidate will result in the decrease in geopolitical uncertainty but will undermine the US economic performance. A leading brokerage Axiory has reported that the foreign exchange market (Forex, FX) is very concerned with the performance of USD in comparison to its European counterparts like Euro and British Pound. The US economy performance has caused outperformance of USD during the last couple of years. However, a lot of investors are now concerned about the longevity of this pattern as the loss of elections by Donald Trump will result in the reset and give way to foreign currencies to start making a comeback. The impact of elections on USD is one of the 9 crucial economic indicators for forex trading since there are major economic vision differences between the two ruling political parties. While Donald Trump has been focusing on the improvement of the economy via reduced taxes and regulations on corporations the democratic counterparts are usually increasing these very same expenses due to an increase in regulations and other factors that do not aid the economy but assist the social aspects of the livelihood.
This is also caused by the ongoing worldwide pandemic caused by the Chinese Coronavirus outbreak that started in January 2020 in Wuhan, China. Since then this highly infectious decease has started spreading all across the world causing countries to lockdown their borders effectively stopping major industries from operating. The heavy social distancing laws (or rules depending on where you are) have also made sure that inside of the countries business sectors like service, tourism, and anything that involves high concentrations of people have been officially banned. This caused a number of small to middle-sized businesses to close down due to the inability to have enough emergency funds to continue their operations. While the governments have started rolling out stimulus packages to their households and companies, most of the time this has not been enough. Two of the industries that took the biggest hits are the airline and tourism sector. Restrictions on gathering and traveling have caused most of the planes to be canned in hangars effectively shutting down the whole season for the tourist sector as well. Airline companies are reporting incredible losses at this point and time.
During this time the turbulent social situation in the US has not helped ease the situation. While the government pushed out stimulus package in April the containment of the coronavirus has not been so successful. States that started to open up due to federal initiatives are finding it hard to keep their doors open. Apart from this, with the unfortunate death of George Floyd, an African American citizen of the US, at the hands of mistreatment from the Minneapolis police department has caused huge rallies from people protesting the systemic racism and police brutality in the country. While the cause is understandably noble these protests can be directly attributed to the increase in the coronavirus cases all across the country. At this point, there are 5.5 million confirmed cases and over 173,000 deaths all across the country with the biggest concentration being in major states like California (640,000 infected), Florida (584,000), Texas (582,000), and New York (432,000). These states are major drivers of the economy and such high rates of the COVID-19 infection have caused the US economy to slow down to a crawl. At this point, the country is reporting almost 34% shrinking of the economy – something unseen even at the times of the Great Depression. These are some of the major factors that have led to the downfall of Trump’s polls.
As of now, both presidential candidates are rallying their supporters. However, an expectation that Joe Biden is considered to be extremely market unfriendly. This is why lots of investors right now are turning their attention to foreign currencies instead of the USD since they are expecting the multi-year up-cycle of dollars to start turning.
David Bloom, Global Head of Forex Research at HSBC, has come out explaining that the main argument utilized in this scenario is that the victory of Democratic Presidential candidate or even a clean-sweep can give room to higher corporate taxes as well as pressure on tech firms that are the main drivers of the US stock market gains. This could easily turn into the reversal of the US equity outperformance relative to overseas. This in turn will prompt outflows and thus weaken the USD. It is worth noting that the stock market has seen a historic 50-days rally after the downfall of the economy in March. However, this is not to say that the economy has recovered since the US stock market is not a good example of whole economy performance.
Investors Against The Democratic Candidate
Joe Biden, much like any other democratic candidate, will bring back draconic corporate regulations, higher taxes, and a much higher focus on social and environmental sustainability. This will have adverse impacts on the US economy’s outperformance advantage that it gained during the last couple of years.
History shows that most presidents get re-elected on strong economies. However, since the spread of COVID-19 across the country we can see Joe Biden’s polls improving due to the crisis and economic pain that the virus has brought upon the citizens. However, still, the President almost always has an electoral advantage, especially during the times when the economy is strong. The only times when the president didn’t get re-elected after the Second World War was under the rule of Gerald Ford, Jimmy Carter, and George Bush Senior. All of them had the same economic downfall going on for 2 years straight prior to the elections. Due to the shutdowns that we discussed up above the US economy has suffered quite a bit during the first quarter of 2020. We see much the same type of economic and labor market deterioration that could potentially cost Donald Trump the elections. Biden’s polls overtook the POTUS’s first in March when the government introduced lockdowns to fight the spread of COVID-19.
If TD Securities is to be believed and the USD is indeed tracking the US presidential elections then any type of lead that Donald Trump can acquire over the democratic presidential candidate is going to improve the belief in USD from the investors. This could stop the recent weakness that the currency is going through and start the recovery process with pairs like EUR/USD, GBP/USD that will start slowing down their advancements.