Donald Trump is the all but official Republican nominee and Hillary Clinton has a clear lead in the Democratic Party. These are two very different choices for American voters and for markets: a Clinton Continuation or a Donald Disruption.
As Trump’s rivals announce their campaign suspensions, the fight is on for the highest job in the world’s strongest country. In the long 6 months leading to the vote, events on the campaign trail, debates and of course opinion polls are likely to have a significant impact on markets. That’s especially true when the differences are so big. Here is how this could affect the US dollar, as well as other currencies.
President Hillary Clinton
Electing the first female president of the USA is a huge precedent and would serve as great news for women’s rights all over the world, yet in terms of market impact, such a choice would be a clear continuation.
Clinton has been in the public eye for at least 24 years, since her husband Bill was running for president. She received public attention during her 8 active years as First Lady, her service as Senator for the State of New York, the highly contested race with Obama and then her service as Secretary of State for him.
While her policies may be somewhat controversial for certain groups in certain aspects, they are well known. In addition, if the baton is indeed handed over from Obama to Clinton, we would have a clear continuation – clear certainty about US economic policy at home and abroad. She would promote more trade agreements like Obama, perhaps a slightly more interventionist foreign policy and perhaps would help women’s equal pay.
All in all, it is hard to see any potential game changing policies coming from Clinton that were not seen during Obama’s reign. One mostly mainstream president would be replaced with another one.
And well before the elections, she has a clear lead in the polls. If this situation is sustained, it means even more certainty leading into the elections.
Clinton and the USD
Leading into the elections, higher prospects of a Clinton presidency would mean a higher chance of the current economic equilibrium, and a higher chance the the Federal Reserve will indeed raise interest rates as they plan. The path will remain gradual and the Fed is unlikely to rock the boat before the big vote in any case.
Nevertheless, after the elections, in the December meeting, Yellen could announce a second rate hike at the one-year anniversary of the first one, following up with the extremely gradual policy into 2017. Bond markets are already pricing just one more hike this year, so this fits together.
So, the greenback will likely enjoy positive flows from growing chances of having Clinton as the 45th American president, due to potential Fed policy.
How will other currencies fare? They will continue their current trade, depending on regular indicators in any country. Perhaps the ultimate safe haven Japanese yen would lose ground on less demand for safety, but moves are not likely to be huge, as this is the baseline scenario.
President Donald Trump
The specter of having a racist, women-hater, violent and not-really-successful businessman as the person with nuclear codes is quite scary but is a real option. Most Americans are not pleased with the status quo, to say the least. With a controversial and not so charismatic establishment candidate such as Clinton, voters might not rush to the voting booths and those supporting the headline grabbing Trump could carry the day.
What would be Donald Trump’s policies? With so many contradicting statements about practically every topic from abortion to the unrealistic wall on the Mexican border, Trump’s economic policy is anyone’s guess. This in itself is troubling for markets, that hate uncertainty.
But if we do take Trump to his word, he will try to use his Art of the Deal to get better trade deals with other countries. This is also disruptive, at least in the short term. Even if the Donald Deals will make America great again as he promises, this will certainly take time. In addition, he may as well face a disgruntled opposition: Democrats controlling the Senate or his own Republican party not cooperating with the newcomer.
Trump may always back down from populist comments made on the campaign trail and opt for moderate policy as some of his voters assume, but this is always an uncertainty.
Trump and the USD
Growing prospects of a Trump Presidency mean growing prospects of more “wait and see” from the Federal Reserve, at least in the short term. The uncertainty could also result in less investment, something we are already seeing in the UK with uncertainty regarding a potential Brexit.
With lower prospects of rate hikes and an ever slowing economy, the Fed could even hint about reversing policy and going as far as opening the door for QE4, as Bill Gross suggests. In addition, a worsening economy could also tilt voters toward the change candidate, Trump, and against the more-of-same candidate, Clinton, acting as a vicious cycle against the dollar.
What about safe haven flows into the US dollar? This is a possibility, as we’ve seen with the S&P downgrade of August 2011: the greenback benefited from flows into safe US bonds even as they were downgraded. That is due to the notion that if the US cannot pull the world forward, other areas of the world are going to suffer even more.
However, fears of the Fed might trump safe haven flows. It is important to remember that the dollar is not the safe haven currency of choice. The yen is the ultimate safe haven currency. In case Trump strengthens, short USD/JPY could be a huge trade, much more significant than long USD/JPY in case Clinton gets closer to the White House.
And what about the euro? We have seen that the ECB did not manage to push the euro down with its recent policy moves, but it did take it out of the safe haven camp. This may change if Trump gains ground. With the ECB reaching a near-exhaustion point in monetary loosening, money could be once again repatriated to the old continent, as we’ve seen with every bad turn in the Greek crisis of 2015.
So, in case Trump gets closer to the White House, EUR/USD long and USD/JPY could be good trades.
What about commodity currencies? They could suffer such “risk off” markets, and the worst hit currency could be the Canadian dollar. Canada depends on trade with the US. While some Americans will try to move to Canada (probably very few), the bigger economic impact will come from a worsening US economy and a potential for worse trade relationships and this could certainly weaken the loonie.
To a lesser extent, also the Australian and New Zealand dollars could suffer as they are “risk assets” as well. The same goes for the British pound, but the impact on cable will be more visible once the Brexit cloud gets out of the way. If Brits opt for an EU Exit, the pound will likely focus on the implications of this vote rather than the US elections.
Presidential Elections and currencies conclusion
Clinton is continuation and more of the same for all currencies, with a potential for a slightly stronger dollar, especially against the yen. The Donald is a Disruption, bad for the US dollar against safe haven euro and yen and good for the greenback against the Canadian dollar.
We will examine this as the campaign advances.
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