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Analysts at TD Securities suggest that for the dollar, the setup and outcome of US elections imply a binary outlook to some degree and they think the risks are skewed to the downside, owing to a few fundamental and technical factors.

Key Quotes

“We believe the FX market will reward both growth and value currencies over the coming months (and for much of next year). The easy money years are drawing to a close, leaving the market to reprice rates and FX after years of unorthodox monetary policy easing.”

“For the midterms, the critical factor to watch is whether sentiment towards US assets will shift, leading to a convergence of US and ROW equities or lower risk-adjusted returns in US equities.”

“A divided government would most likely leave investors wondering how the US would generate above-trend growth once the fiscal support fades. At the same time, the recent growth upgrades highlighted above argue the market has already priced in lots of good news for the year ahead. The result is that expectations are high, but a divided government may sow the seeds of uncertainty that leads to disappointment.”

“Any shift on the shortterm growth narrative would reinforce a deeper correction in the G10, especially as the Democrats would look to drive the impeachment theme from the get-go.”

“Given our views on broader G10 valuation, this setup would benefit the major European currencies like EUR, GBP, and SEK.”

“A Democratic wave that leads to control of both the House and Senate would be undoubtedly USD bearish.”

“We think it is unlikely that Dems would look to strike a deal and would prefer to tactically focus on impeachment. That favors the convergence scenario, benefiting nearly all the other reserve currencies like EUR, JPY and GBP.”