U.S. Dollar Decline Looms if Democrats Take House of Representatives in Midterm Election says BNP Paribas

© Robert Cicchetti, Adobe Stock

- USD will be left vulnerable by any midterms "Blue Wave".

- As Democrat victory will ties Trump administration's hands.

- Democrat win of House may also set impeachment ball rolling.

The Dollar will be vulnerable to losses and America's stock market might suffer a setback if the opposition Democratic Party rides a "Blue Wave" to victory in November's midterm elections, according to analysts at BNP Paribas. 

Democrat efforts to frustrate President Donald Trump's agenda would become more effective following a midterms victory as such a result would deprive the White House of an outright majority in Congress, necessitating a process of horse-trading before any future legislation can be approved. 

This would make a second round of tax cuts and reforms much more difficult to move through Congress, while rendering efforts to repeal unnecessary regulations and reduce red tape for businesses all but impossible. In short, passing stimulus measures to counter any possible slowdown in the show-stopping U.S. economic expansion would become a tall order.

"The main economic implication of this scenario would be to freeze the outlook for fiscal policy, making it unlikely that new fiscal or deregulatory stimulus could be delivered to counter the slowing in US expansion, which we expect in 2019. As a result, we would expect markets to move closer to pricing in our base case forecast for US front-end rates to top out in Q2 2019, leaving the USD broadly vulnerable," says Daniel Katzive, head of FX strategy, in a note to clients. 

Americans will go to the polls in November when all 435 seats in the House of Representatives and 35 of the 100 Senate seats will be up for grabs. There is a precedent of White House incumbents seeing Congressional majorities reduced at the midterms. Trump only has a narrow majority.

BNP says it would take a net change of just 23 seats in the House in order for Democrats to take control of the chamber. And opinion polls, for whatever they are worth, are consistently showing the Democrats on the front foot.

Those polls also suggested Donald Trump had no chance of winning the presidency but outcomes from several special elections, or byelections, over the last two years support the pollsters' numbers. Republicans have lost ground in each special election since November 2016. 

"We put the chances of a Democratic House–Republican Senate at about 65%. A full Republican defense of Congress, with the difficulty in doing so mainly being in retaining their House majority, we give about a 25% chance. Lastly, we put a “Blue Wave” scenario that has Democrats winning majorities in both the House and Senate at about 10%," says the BNP Paribas team. 

All of this matters for the Dollar because, despite all of its controversy, the Trump administration's huge and far-reaching tax cuts have been key to the greenback's 2018 renaissance. This is because they've driven a pickup in U.S. growth at a time when the rest-of-world economy has begun to slow.

That divergence enabled the Federal Reserve to go on raising its interest rate while other central banks sat on their hands, helping the Dollar index convert a 4% first-quarter loss into a 3.5% 2018 gain over the last seven months.

Therefore, a Democrat victory would undermine the odds of another stellar performance from the economy and U.S. Dollar.

The Dollar index was quoted 0.12% higher at 95.61 Wednesday and is now up 3.5% for the year overall. The Pound-to-Dollar rate was 0.17% higher at 1.3001 while the Euro-to-Dollar rate was down 0.11% at 1.1536. 

"The increase in House investigations and impeachment probability would also leave markets more sensitive to headline risk going forward," says Katzive. "The news site Axios obtained a spreadsheet circulating in Republican circles that previews the investigations Democrats will likely launch if they win the House. It catalogs more than 100 formal requests from House Democrats, spanning nearly every committee."

There is another potential consequence that could come from a Democrat victory in November. It would open the door for some hardline opposition members, as well as anti-Trumpers within the Republican Party, to impeach the president for whatever happens to be the controversy of the day. 

The U.S. constitution gives the House sole power to impeach a president through a simple majority vote although the subsequent trial has to be carried out in the Senate and requires a total of 67 out of 100 votes to convict. 

Opposition politicians and broad swathes of the media have regularly pondered aloud the prospects of impeachment ever since the November 2016 election.

Many held up a special counsel investigation into alleged collusion between the Trump campaign and "Russia" ahead of the 2016 election as likely to yield grounds for the President to be ousted.

Now, more than 18 months in, the probe has produced a series of indictments unrelated to the original purpose but failed to find evidence of collusion by the President or his campaign.

Advocates of impeachment have since turned to a similarly long-lived complaint based on Trump's alleged breach of the foreign and domestic emoluments clause in the constitution. 

The District of Columbia and State of Maryland, both the strongest of Democratic Party heartlands, have sued President Trump in a Maryland court.

They allege that he is in breach of the constitution because one of his hotels is often used by domestic and foreign dignatories. The hotel was opened before the 2016 election and is located on the same street as the White House. 

"We think the volume of inquiries and hearings would be quite high and likely take a toll on the Trump administration’s resources, both in terms of time and personnel," says Katzive. 

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