2020 elections hold the key to the USD – Westpac

There is some evidence that the USD will behave differently in election years depending on whether a Republican or Democratic presidential candidate is leading in the polls, explained Richard Franulovich, Head of FX Strategy at Westpac.

Key quotes:

“The conventional wisdom is that Republican candidates are more business and market-friendly and as a result equities and the USD tend to perform better when expectations favour of a Republican presidency. Slide two shows the performance of the DXY index in the nine presidential election years since 1984. We split the small sample into two sub-groups – the DXY’s performance in those election years when a Republican candidate led in the polls (Bush (2004, 2000), Bush (1988) and Reagan (1984)) and those years when a Democratic candidate led in the polls (Clinton (2016), Obama (2012, 2008), Clinton (1996, 1992)).”
 
“While the DXY index ultimately tends to finish the year higher regardless of the winner in a presidential election year (rising in 8 of the last 9 election years), it nevertheless spends the bulk of an election year on the front foot when a Republican candidate has been leading in the polls and tends to underperform for much of the year (until Oct/Nov) when a Democrat candidate is leading. See slide two. The caveat is that our sample is small and monetary policy and global growth can be just as influential in driving the USD. Moreover, the make-up of Congress will be a crucial factor shaping how much of a president’s agenda can ever become legislative reality. That said, there is some historical evidence backing the view that markets may trade more cautiously in 2020 if a Democratic candidate, especially a strong left-leaning candidate, has a strong lead in the polls.”