Investor Sentiment Around the US Election Outcome Pushes Up Commodity Currencies

Investor Sentiment Around the US Election Outcome Pushes Up Commodity Currencies

Published: November 6th, 2020

The US election has driven an unsettled week for the dollar, but amid the spikes and dips, one thing has been notably consistent: trading lower against commodity currencies. It has underperformed against AUD, NZD, and CAD for much of the week.

Combined with weakness in safe-havens like the yen and franc, the loonie, aussie and kiwi all strengthened, suggesting that markets adopted a risk-on approach ahead of the US elections.

NZD/USD recorded gains of 2.19 per cent with a rally that started Tuesday on the back of projections that the Democrats might capture the presidency and potentially both houses of congress. A buy-all frenzy pushed the New Zealand dollar and its sister commodity currencies to post sharp gains at the greenback’s expense. NZD lost some of its gains on Wednesday as uncertainty about the election outcome gripped the news cycle, but climbed again on Thursday as pundits became more confident of a Biden victory.

US presidential election news has driven much of the price movement in global currency markets this week. As of this writing, the Democratic challenger Joe Biden appears to be on track to secure a narrow majority of the country’s electoral college votes.

Different agendas and different market expectations

Analysts say market participants have considered what each candidate's policy plan is likely to be over the next four years and made projections of their own on what the possible impact each side will have on financial markets.

Incumbent president Trump, for example, has said he will keep corporate tax cuts enacted in 2017, which could be positive for US stocks. If Biden wins those cuts could be reversed in part of completely, given the Democratic challenger’s calls for higher taxes on high-net-worth individuals and large corporates.

But despite concerns about a more liberal tax agenda, Biden’s modest spending plans seem unlikely to cause a significant trend reversal. Stock prices elsewhere in the world may react differently from US equities, not least because a Trump victory could well lead to further trade friction with China and other countries. Non-US equity markets may see a Trump victory as a net negative and retreat on the news.

Biden’s stance on trade issues is expected to soften the bullish rhetoric of the Trump white house and ease-off on punitive action, which could push global equities into gains, even if US indices experience a dip. It's worth noting that, during Trump’s term in office, US stocks performed much better than their Asian and European counterparts.

Currency traders may see a dollar slide if Biden wins

For forex traders, a Biden victory could see further slides in the US dollar. While both camps say they want more infrastructure spending in the next four years, Biden’s commitments have been looser. They could result in some dollar selling if markets think his administration is ambivalent about starting new projects.

A steadier hand on international trade relations could also see the yen and other safe havens slide, while commodity currencies like CAD and NZD could strengthen further.

If Trump secures re-election, the reverse could happen. If the country experiences an extended delay in announcing a winner or uncertainties caused by court challenges and contested results, investors could flee risk assets and take shelter in safe havens until the outcome becomes more evident.

Markets could also react on clarity about which party will have a majority in the US Congress: e.g. the Senate and House of Representatives. Democrats currently control the House, and Republicans control the Senate. If the presidential winner isn’t backed by substantial majorities in congress, markets may see that as a balancing condition and react more modestly, as neither candidate will have the numbers to push through an aggressive agenda.

For example, if current direction of travel persists and Biden wins but fails to take control of the Senate, stock markets may shrug as Republicans would have a likely veto over any decision to raise taxes. Republicans could also stymie white house spending plans, which could cushion any slide in the dollar’s value.

In other significant activity this week, Australia’s central bank cut interest rates to 0.09 per cent from 0.24 per cent, and extended Canberra’s bond-buying program by 100 billion AUD, purchasing bonds with between five and ten years’ maturity. AUD dipped by ca. 24 pips against the greenback on the news, sustaining its position alongside other major G10 economy currency gainers.

The mild market reaction to the news suggests market participants anticipated it and interpreting it as a signal that bank officials won’t cut rates further. Forex traders in Australia and elsewhere are likely to focus on the US elections in any event when modelling outcome scenarios this week and next.

Other events to watch

Other indicators analysts are watching this week include (outside of politics) are the American Petroleum Institute (API) report on crude oil inventories for last week, and US factory orders for September. Factory orders were expected to rise by a full percentage point or more August.

For commodity currencies, Australia’s retail sales report and New Zealand’s employment report for Q3 are due to be published. New Zealand’s jobless rate is forecast to rise, going from four per cent to above five per cent. The net change in employment will likely reveal that the kiwi economy has shed 0.79 per cent of its jobs on top of the 0.39 per cent lost in Q2. Australia’s retail sales are expected to post a quarterly rebound of 6.0 per cent or higher. New Zealand’s labour cost index has likely slowed to ca. 1.5 per cent versus ca. 1.8 per cent at this time last year.

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