A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Election Day Wild Cards
Share this story:
Andrew Kositkun Foreign Exchange Head Trader
Today is Election Day, and market pricing indicates that markets are expecting a low-drama blue wave result. A Biden administration coupled with a Democratic sweep of Congress makes a large fiscal package, in the $2 trillion range, and U.S. dollar weakness likely. This fiscal package should include aid to small business, the unemployed, state and local governments, and COVID-19 containment funding. The reason a larger fiscal package isn’t expected is because the Democrats will need votes from the most moderate Democrats as they will likely only have a slim majority in the Senate.
Of course, nothing is for certain, making it prudent to look at possible wild card outcomes and their impact on exchange rates. These include:
A Trump Re-election
This outcome likely leads to renewed U.S. dollar strength due to increased uncertainty as markets could be in for another four years of trade conflicts and geopolitical uncertainty. A Trump re-election is also likely to see additional fiscal stimulus, albeit at a lower level than with a blue wave, which should support U.S. growth and a stronger dollar. Under this scenario, the Japanese yen is likely a key anti-risk beneficiary, with the Mexican peso vulnerable to trade and geopolitical concerns.
A Contested Election
A contested election should lead to increased uncertainty, with cyclically sensitive currencies hit through the broad risk-off move. Safe haven currencies should benefit; however, this should mainly be concentrated on the Japanese yen and Swiss franc. The U.S. dollar, while a safe haven currency, could see its gains undermined by concerns around U.S. institutional stress.
A Divided Government
Additional fiscal support is still expected under this outcome, but the package should be a much smaller one relative to what would be the expectation under a blue wave. It’s probably fair to say a divided government would deliver on a $0.5 trillion fiscal package versus the $2 trillion package expected under a blue wave. This smaller than expected fiscal boost would hit global growth prospects and equity market confidence. The U.S. dollar should strengthen due to its anti-cyclical qualities. However, U.S. growth downgrades, relative to the rest of the world, could be U.S. dollar negative, leaving the ultimate U.S. dollar impact ambiguous.
Regardless of which scenario the U.S. election falls into, the delay in delivering fiscal support means that realized support will come at a time when the economy desperately needs it. Growth is already starting to slow, and fiscal policy from the spring package is starting to turn negative. COVID-19 infections are surging around the country, making it difficult to see how additional lockdown measures can be avoided. Retail spending in October looks OK but the upcoming months could be bleak.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Roughly 105 million Americans have already voted in the U.S. election. For what it’s worth, Biden is up 6.7 points in the RealClearPolitics national poll average, with battleground state numbers tighter. Polls start closing at 7 p.m. ET.
The Reserve Bank of Australia cut both its cast rate and its three-year yield target as expected. Both the cash rate and the three-year yield target are now set at 0.10%. The bank also delivered a dovish surprise with its plan to buy AUD100 billion (~5% of GDP) worth of five- to ten-year bonds over the next six months. Additionally, the bank stated it was prepared to do more if needed.
Ant Group’s world record $35 billion initial public offering was suspended by the Chinese exchange. Changes in the regulatory environment were cited but details were not provided.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become