Hillary Clinton delivering her victory speech at the Manhattan Center Studios, following the New York 2008 primary. © Image via Angela Radulescu.
Election Uncertainty Building
The upcoming US election is a key issue for markets with the potential election of maverick Republican candidate Donald Trump presenting a great deal of risk. Political events can be extremely complex to gage in terms of anticipating how markets will react as we have seen clearly over the last year with the Greek crisis last summer and more recently the Brexit issue.
In an attempt to mitigate the confusing interpretation of various political policies and potential outcomes it is sometimes best to look for precedents in the data and establish if any patterns can be identified. With this in mind let’s consider the last three US elections which saw a new candidate elected in relation to price action in the Dollar Index.
For the purposes of this illustration we will consider the year prior to the election as the pre-election period and a year after the election as the post-election period with a new high post-election, being classed as an UP move and a new low after the election being classed as a DOWN move.
In the 1992 US Presidential elections, the current President at the time, Republican George H.W Bush, lost his position to new candidate Democrat Bill Clinton. During his term, Bush had maligned a significant portion of his conservative support by reneging on the pledge made during his 1988 campaign against raising taxes. The US economy was in recessionary mode and foreign policy, which was perceived as Bush’s greatest strength, was seen as less vital in the eyes of the electorate in the wake of the collapse of the Soviet Union and the relative calm in the Middle East following Iraq’s defeat in the Gulf War.
Looking at the price action you can see that the Dollar suffered losses over the first three quarters of 1992before rebounding over September. However, heading into the election month the US Dollar once again turned lower, dropping over $6 in two weeks.
However, following the election of Democrat candidate Bill Clinton, the US Dollar soared over the remainder of the year and continued higher over the next year also.
Price action summary: Down pre-election – Up post-election
In 2000, with Bill Clinton vacating his position after serving a maximum term, Republican candidate George W Bush beat Democrat candidate Al Gore to become US President.
The context was very even matched and Bush won with only a slight electoral majority of 271 to 266 votes. The election was noted to be the closest since 1876 and was unusual for seeing a President elected having received fewer popular votes than the runner up; only the fourth elections to feature this dynamic.
Looking at the price action in the Dollar Index over the period you can see that the US Dollar had been making steady gains throughout 2000 until turning lower weeks ahead of the election in October. Despite some initial volatility around the election, which saw USD dropping initially, towards the end of the year USD reclaimed higher ground and went on to trade fresh highs over the next year.
Price Action summary: Up pre -election – Up post-election
The 2008 US Presidential election was a key moment in US history with the election of an African-American candidate, Democrat Barack Obama, beating Republican candidate John McCain. Ove the campaign nine states were shown to have changed allegiance and Obama won with a big electoral majority of 365 votes to 173.
Looking at the price action over the period you can see that we had a dynamic similar to that of the 2008 election. The US Dollar traded higher over the majority of 2008, dipped slightly heading into the election and then moved lower initially in response to the election. However, into the end of the year and again USD reclaimed upward trajectory and moved higher over the next several months to print fresh highs in the following year, although short lived
Price action summary: Up pre-election – Up – post election
Looking at the last three US election periods and the corresponding behaviour of the US Dollar index there are some clear dynamics at play:
- Despite the movement of the US Dollar over the year prior to the election, the month or so before the election tends to mark a sharp retracement lower as investor uncertainty ahead of the election leads to position squaring and capital outflows.
- The initial response to the election can be particularly volatile and is not a period where trading systems are expected to perform reliably
- Towards the end of the year, once uncertainty has passed and the market has acclimatised to the results of the election, the US Dollar tends to appreciate and trade to fresh highs when compared to the pre-election period.