It’s normal for elections to have a short-term impact on currencies. But the difference in policy that might be pursued by the two major candidates in the US elections could exaggerate that impact. With both well in the margin of polling, the market can’t fully pre-position ahead of the event.
Next week could see an extreme amount of volatility in the dollar, depending on what happens after Tuesday. The Fed has delayed its meeting by one day, and will announce its policy decision on Thursday. Like all central banks, it wants to remain neutral in terms of the elections, but the results could impact the inflation outlook and therefore the odds of what the FOMC will decide.
How to Trade the Event
It’s a good idea to avoid trading during high risk, unpredictable events like this which could cause strong swings in the markets. The size of the US economy means that it’s not just the dollar that will be affected, but gold, crude prices, emerging market currencies, cryptos and even some of the major currencies could move depending on how the results unfold. However, it’s worth considering what might happen to get a better idea of what to expect of the markets – particularly considering that volatility could extend for quite some time.
The US election result isn’t binary, since there are some complicating factors. First, given how narrow the polls are, there is a good chance that the results won’t be known immediately. The official result might not come in until the end of the month or later, with a narrow victory margin for either candidate subject to legal wrangling like what happened in 2000. This could extend the uncertainty period along with market volatility.
The Potential Options
Also, the Congressional race is just as important. The President has a lot of power when it comes to things like tariffs, which impact the currency. But Congress has exclusive power over spending, which also can impact the currency. A split Congress, whether with each chamber going to different parties, or both chambers being a different party than the president could lead to legislative deadlock. This is a particularly fraught situation as the debt ceiling is set to snap back into place at the end of December, and a full budget still not having been approved. Such a situation could cause yields to spike, dragging up the dollar.
Even if there is a clear winner that is announced early (a sweep of the battleground states), the acceptance speech could also provide additional risk. It’s an opportunity for the winning candidate to preview policies. In 2016, then president elect Trump announced a $1.0 trillion infrastructure spending program on the US election night, causing the stock market to rocket higher along with yields as investors priced in more inflationary pressure.
Who Will Win?
A win by Harris, but with Republicans holding on to Congress, would likely be interpreted by the markets as a continuation of the status quo. This could bring back speculation of larger rate cuts by the Fed as the economy continues to cool along with inflation. If Harris gets a strong Democrat backing in Congress, then investors could start pricing in more inflation from increased government spending. But this might not support the dollar as the expected tax increases would also weigh on the dollar, meaning the Fed would likely stay on an easing footing to support the labor market.
A win by Trump, and Democrats managing to get at least one chamber of Congress, polling odds favor a “double flip”, with the house going Democrat and the Senate Republican. This would give Trump full support to implement tariffs, on top of markets worrying about a fiscal cliff early next year. This could contribute to the Fed giving up on its rate cutting program and substantially boost the dollar. But if Republicans sweep Congress as well, then markets might become more worried about the effects of spending cuts on top of tariffs. This could lead to pricing in a recession, with the Fed expected to drastically cut rates and potentially weaken the dollar.
That is, barring no major surprise, like a post-election policy announcement by the winning candidate.