Image © White House
- USD rebounds following impeachment sell-off but inquiry to go ahead.
- House of Representatives eyes impeachment but Senate stands in way.
- Republican control of Senate means impeachment bid remains symbolic.
- RBC says USD might benefit from impeachment, but others eye losses.
- Price action a reminder to market of a 2020 political dimension to USD.
The Dollar advanced across the board Wednesday as market unease over a House of Representatives attempt to impeach President Donald Trump faded, although analysts are divided over what any recurring attempts at ousting the White House incumbent will mean for the greenback and so-called risk assets.
America's Dollar and stock markets have done nicely out of the Trump presidency so anything that suggests a premature or unexpected end to it may always have been likely to ruffle feathers in the market, although some analysts say the adverse impact of such a thing would be less now than in the earlier stages of the incumbent's tenure.
"This is only the first small step on the road to impeachment. It is not clear whether the House will even get a vote to endorse the inquiry, much less so that impeachment would get the 2/3 majority in the Senate that it would require," says Adam Cole, chief FX strategist at RBC Capital Markets. "It is not clear that Trump’s early departure would be as negative for risk and USD as would have been the case early in his presidency when the policy agenda was dominated by the delivery of the 2018 tax reforms."
Analyst discussion of impeachment comes after House of Representatives Speaker Nancy Pelosi announced the beginning of a formaly impeachment inquiry following the close of business on Tuesday. Speculation that such a move was in the pipeline had already hit the stock market and Dollar, although the greenback also sold off for several hours after the announcement before eventually recovering.
"It sets the stage for a highly divisive Presidential election campaign next year. It remains to be seen whether opening up an impeachment inquiry will work against or in favour of President Trump’s re-election chances. We still think there is a good chance he will win another four years in office. Heightened political uncertainty in the run up to the election could further undermine the outlook for business investment and growth in the US, and pose some downside risks for the US dollar," says Lee Hardman, an analyst at MUFG.
Above: Dollar Index at daily intervals, annotated for recent events including trade developments.
Speaker Pelosi announced the inquiry following deliberations with Democratic Party colleagues, which comes as a response to alleged attempts by President Trump to strong-arm Ukrainian President Volodymry Zelensky into investigating Joe Biden, a 2020 Democrat presidential candidate, and a member of his family. It's been alleged that Trump withheld aid to Ukraine in an effort to force an investigation that would risk tainting his rival.
"With those reforms delivered and policy now dominated by trade wars and pressure on the Fed, we could make a case for Trump’s early departure being positive for USD," says RBC's Cole. "We would not be surprised to see markets trading rising risk of Trump’s removal as USD-positive rather than negative."
Trump and others are reported to have previously alleged that Joe Biden and members of his family were involved in corrupt activity in Ukraine during a period when Democrat stalwart served as former President Barack Obama's deputy. A formal investigation of Biden would undoubtedly aid Trump in any election battle with him.
Opposition politicians, some of whom have sought to remove Trump from the White House ever since his January 2017 inauguration, say Trump's alleged actions amount to an abuse of power that satisfies their own subjective criteria for warranting his removal from office. But analysts say the attempt at ousting him is unlikely to succeed, even if speculation relating to it does continue to have an impact on the Dollar.
Above: Euro-to-Dollar rate at weekly intervals, falling since Jan 2018 tax cuts and Q2 2018 trade war.
"As a rule of thumb a rocking of the political status-quo tends to be a currency negative factor," syas Jane Foley, head of FX strategy at Rabobank. "The DXY dollar index tumbled between August and October 1998 as lawmakers attempted to impeach President Clinton. It did then recover. In any case different dynamics are currently at play today. Since the current impeachment process is likely to stumble in the Republican held Senate, it is likely that the market will continue to focus more on the issue of US/Sino trade wars."
Opposition politicians will need to win a two-thirds majority in the Republican held Senate in order to successfully oust President Trump from office, which leaves the odds of success in the venture looking rather long and the market remaining focused on the trade war with China. That tariff fight with the world's second largest economy, which would presumably come to an end in the event of an impeachment, has so-far lifted the Dollar and is another reason the greeback might fall in the event of impeachment.
Trump criticised Chinese trade policy in a speech at a United Nations gathering Tuesday, prompting unease in markets that had until then allowed themselves to believe that talks set to take place between both sides in October could result in a deal that at least temporarily suspends the 18-month long trade war between the world's two largest economies. Rabobank's Foley says the trade war will continue lifting the greenback, forcing the Euro-to-Dollar rate down to 1.09 before year-end in the process.
"Sentiment has taken a turn for the worse since multiple developments yesterday in the US session, especially the belligerent speech from US President Trump at the UN souring hopes for productive US-China trade talks," warns John Hardy, chief FX strategist at Saxo Bank. "Sterling could be in for further pressure even on the rising probability of a Brexit delay."
Above: GBP/USD at weekly intervals, driven by Brexit since 2016 as well as strong USD since 2018.
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