All that matters this week is the US Election – the risks are high and the permutations large. Interestingly FX markets have actually entered this strange period of ‘quiet’ as it is a calm before the storm event.
Now there are gyrations particularly with COVID issues flaring in Europe and the US but in the main, the USD is waiting for results or possible ‘non-results’ before defining its next leg.
Here is a genuine question: If you were to trade FX right now how would you do it?
I ask this because what theory suggests and what actuals are doing are not necessarily aligning.
Here is an example:
If the ‘Blue Wave’ scenario played out where Biden took the Oval Office and the Democrats swept the House and the Senate – policy is likely to be highly fiscally stimulative. The third COVID bill of upwards of $2.2 trillion would be released quickly coupled with additional support over the coming 4 years. You then add in a Central bank that is willing to add more support and has the fire power to outpace all other comers you get a picture that is a USD negative.
However, going back to the question above, how would you position to this scenario? This scenario is likely to create asset appreciation, its likely to see confidence and spending recoveries and its likely to attractive investment – that’s a USD positive even with the mass stimulus going into the market.
One could also argue the same point in the other direction, Trump holds the Oval office and the Republicans take the House and Senate. Trump will look to put through some very strong economic pump policies – USD positive.
The real issue is the Senate. Senate Republicans are starting to flex some muscle and are showing signs that they might obstruct policy particularly big fiscal spending. If Biden was to win the Oval office but faced a Republican controlled Senate, the impasse would possibly be a bigger negative than any other combination. The risks involved and the uncertainly it could cause would likely be one of the biggest ‘on the day’ movers of FX markets.
This will be risk personified, and why maybe the Senate is the ‘real’ Election to watch.