The US Dollar has come under notable pressure this November as the race for the US President gets closer and leaves markets having to price in uncertainty.
- Trend of US Dollar weakness on Trump victory not guaranteed says Deutsche Bank
- Further out, Trump victory could have very favourable implications for FDI, the US narrow basic balance and the USD
- Euro to Dollar exchange rate is initial winner of tightening polls
On Tuesday, November 1 a respected ABC News/Washington Post poll showed Trump edging into the lead by 1.0% - the first time he had led since May.
The move has been echoed in other subsequent polls, and importantly, in polls for key swing states.
Hillary Clinton’s slippage in the polls appears to be strongly associated with a softening in equities and credit, notably high-yield; "Treasuries can’t quite make up their mind between the risk-off short-term bullish bond signal, and the medium-term bearish implications of a possible large Trump fiscal stimulus," notes Alan Ruskin at Deutsche Bank.
In the world of currencies, the USD has tended to weaken versus the majors, while appreciating sharply versus a few select EM, most obviously the MXN.
The Euro was a big winner of the move and we saw both EUR/USD and EUR/GBP shoot higher. "The EUR’s relative safe-have appeal and tendency to rise in a risk-off market will continue to support the currency", says Viraj Patel at ING in London.
The ABC News/ Washington Post poll showed Trump on 46% versus Clinton on 45%, however, the result also carried the proviso that the result was subject to a 3% margin of error.
The poll also showed a waning in the enthusiasm of democratic supporters for Hillary as only 45% registered enthusiasm for her against 53% for Trump amidst his voters.
This signaled a fall of 7% in the enthusiasm rating for Clinton from the previous ABC News/Washington Post poll.
Other polls showed a narrowing of Hillary Clinton’s lead rather than an outright lead for Trump.
Clinton still leads CNN’s Poll of Polls an average of the last five phone polls by 46% to 42%.
Emboldened by the better poll results, Trump broadened his campaign’s line of attack to ambitiously target more Clinton supportive battleground states, rather than just the close-call key states targeted so far.
“The strategy, his campaign says, seizes on shrinking polling margins in states like Michigan, New Mexico and Colorado, and comes on the heels of fresh questions about Clinton’s private email server and news that Obamacare premiums are poised to rise dramatically in many states next year,” said an article on RealClearPolitics.com.
The fact Trump is putting resources into tackling a state like Michigan where Hillary Clinton enjoys an average 6.3% lead, is a sign he is going for broke in an attempt to win the White House.
Clinton meanwhile is continuing to focus on the very close states of Ohio where she gave a speech on Monday, October 31 and Florida where polls are currently showing the candidates neck-and-neck.
US Dollar - Recovery or Further Weakness?
The political turbulence in the forex markets comes during an especially eventful week for markets, with several major central bank meetings including the Bank of England and Federal Reserve rate meetings and the release of the most market moving report in the US, Non-Farm Payrolls on Friday, November 4.
The dampening effect on the US Dollar, of Trump’s poll lead, was seen as a possible buying opportunity by some analysts.
DailyFX’s James Stanley says the Dollar was poised to rebound later in the week as a result of the Fed meeting or Non-Farm Payrolls if those events suggested a steeper monetary policy tightening trajectory in the medium term, as opposed to the ‘lower for longer’ outlook currently priced in.
“The U.S. Dollar has been exceptionally weak since news broke on Friday about a re-opening of the investigation in to Hillary Clinton’s emails. With the Fed meeting tomorrow and then Non-Farm Payrolls on Friday – the opportunity certainly exists for a hastening or reversal of this theme in USD,” said Stanley.
However, others believe the Dollar will continue to struggle.
"The recent resilience of equity markets to steepening yield curves gave way yesterday and the spike in the VIX suggests that we’re in for a spell of risk-off, at least until election day," says ING's Patel.
The Trend is not Guaranteed
The trend so far has certainly been one of US Dollar weakness on Trump's ascendency, but this won't necessarily always be the case argues Alan Ruskin at Deutsche Bank who warns traders should not extrapoliate from pre- to post-election.
"These reactions are all well and good for now, but we suggest it is unwise to expect this market response to show persistence, especially after the election," says Ruskin in a client note.
While a Clinton victory might initially be greeted with a risk relief rally on the prospect of policy continuity and predictability, Ruskin would also expect that her capital gains tax plans will have a negative/dampening impact on some key risk bellwether assets like equities into the turn of the year.
"More specifically, Clinton has proposed a sliding scale for realized capital gains depending on the years an asset is held, starting at ordinary income marginal tax rates for assets held less than 2 years and sliding to 20% for assets held for 6 years or more. One market concern is that this will bring forward capital gains into the current tax year and be extremely disruptive for risky assets, even if in theory it could encourage assets to be held longer thereafter," says Ruskin.
The reverse is also true for Trump argues the Deutsche Bank analyst.
If Trump wins, there is the very real possibility of a shift from gridlock to ‘trumplock’, with a secure Republican House majority and the GOP quite possibly also holding onto a small Senate majority.
"Even with Congress acting as a buffer to fiscal profligacy, a large fiscal stimulus would then almost certainly be in the offing, probably inclusive of a transformational shift in corporate tax structures. This could have very favourable implications for FDI, the US narrow basic balance and the USD. The market will rightly have some serious concerns about long-term fiscal sustainability and the longevity of stronger growth," says Ruskin.
Deutsche Bank also believe there could also be some similarities with the early stages of the Reagan 1983-84 boom, before the subsequent slowdown showed the limits to a supply side structural uplift in growth.
"The Reagan boom was associated with stronger equities, sharply higher Treasury yields, and a much stronger USD - exactly the opposite of the market response we saw in Tuesday’s trading," says Ruskin.