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USD: Hung congress would be a bad scenario – Nordea Markets

In view of analysis team at Nordea Markets, a hung US congress would be a bad scenario for the USD, while we should expect EUR/USD to drop swiftly through the 1.13 level in case Trump and the Republicans manage to secure another 2 years with a Republican majority in both chambers.

Key Quotes

“Historically the USD has fared poorly both before and after mid-term elections which have resulted in a hung congress, while there is no significant USD-pattern around other mid-terms.”

“If we get a hung congress, then we should prepare for more a mix of aggressive trade rhetoric (due the president’s widespread prerogatives on trade) and no further fiscal stimulus.”

“Whether a fluke or not, the USD has tended to fare well when Trump has fared well and vice versa.Trump is associated with a strong pro-cyclical policy mix by now, why a weak election for Trump and the Republicans should be considered USD negative. Prospects of less fiscal stimuli is not what the USD needs right now, given the stretched long USD positioning and the weak outlook for the momentum in the ISM index from here.”

“On top of the usual poor USD track-record in a hung congress scenario, a potential debt ceiling stand-off is another USD negative. If the Democrats take control of the House, then it carries with it negative implications for the USD, as it boosts the likelihood of a surge in US excess liquidity early next year because of the debt ceiling coming into force on March 1.”

“The debt ceiling will at the very least lead 200bn USD (potentially up to 350bn or even more if you take year-end into account) into the commercial banking system, as the Treasury will have to bring down its cash balance at the Fed. A liquidity addition of that magnitude should have a negative effect on the USD.”

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