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US Election 2020: What happens to the US dollar with a Democrat clean sweep?
There are various permutations of results from this year’s US elections, but polling data increasingly indicates a strong chance of a Democrat clean sweep of the House, Senate and White House.
Obviously, the question for forex traders is what this may mean for the USD.
Traditionally the US dollar performs well in election years. The dollar index (DXY) has only fallen in two of the last 12 elections, with the drop in 2012 only marginal.
According to Morgan Stanley, the key is not who wins but whether you get gridlock in Washington or not. The bank sees USD strength from a Democrat ‘blue wave’, that is a clean sweep of the House, Senate and White House. But they also see USD strength from a Republican full house, as unlikely as that seems now based on the polls. The US dollar would be more likely to soften if Donald Trump wins but the House and/or Senate are controlled by the Democrats.
Pandemic changes everything
Historical patterns may not prove much use, however, due in large part to the massive amount of fiscal and monetary easing that has been carried out not just by the US but also its G10 counterparts. This has created an unusual backdrop to the election and means the waters FX traders are swimming in are murkier than usual.
According to researchers at Sweden’s SEB, the dollar rose in the 100 trading days after nine of the past 10 elections from 1980 to 2016. Democrat wins produced a 4% rally on average, whilst a Republican victory saw a gain of 2%.
So, can we expect the dollar to rally after the election no matter what the outcome? It’s clearly a lot more complicated, not least because of the unique macro-economic backdrop created by the pandemic.
Indeed, foreign exchange analysis from investment banks UBS and Crédit Agricole suggests precisely the opposite. One argument is that Trump’s policies of fiscal stimulus and protectionism have supported the dollar, so a Democrat clean sweep could pull these legs from under the USD.
However, there are not many signs of the Democrats taking a more lenient approach to China, in fact both sides seem to be vying to be seen as tougher than the other on China. Therefore, trade disputes and battles of intellectual property rights will, in all likelihood, persist.
On the fiscal side, it’s hard to see much difference – both camps back massive stimulus to support the economy post-pandemic, whilst the Federal Reserve is very clearly prepared to keep rates at zero for as long as necessary. The usual rules of the game in terms of how the dollar responds to fiscal and monetary policy inputs have to a certain extent been thrown out by the pandemic.
Donald Trump has been a little wayward in his messaging around the dollar’s strength – it’s normal for presidents to underscore the idea that a strong dollar equals a strong USA. The ‘strong dollar policy’ has been in place for at least 20 years and initially Trump was seen moving away from this stance.
Whilst he has been more resolutely in the strong dollar camp lately, there is always the risk that post-pandemic the president again calls for a weaker dollar to make the country more competitive.
Relative economic performance and relative expectations of interest rate differentials will be what matters. Will the euro rebound with a fiscal stimulus package? Will the pound stabilise after Brexit?
The euro matters most when we look at this other side of the dollar equation as EUR has an outsized weighting in DXY – more than 50%. So, when we look at USD, or DXY, strength we are also to a large extent looking at EUR too.
The European Central Bank (ECB) has like the Fed responded to the pandemic with a massive increase in its QE programme. Efforts on the fiscal side have been slower, but in spite of concerns among some member states about the nature of stimulus funding, there seemed to be a broad agreement on the need for support.
Crucially right now the more ‘dovish’ policymakers are the more it supports the currency – the worry is that not enough support risks growth, but also creates pressure in bond markets, leading to a widening of spreads between bunds and peripheral yields. The ECB seems to be in ‘whatever it takes’ mode, though we note German resistance to participating in asset purchase programmes. The risk really lies on the fiscal side.
Failure to agree to the fiscal measures being discussed as part of the EU budget talks would be negative for the currency. Whilst an agreement is the base case, it may not deliver fully on its promise and may be a watered-down version to the €750bn rescue fund put forward by the European Commission.
US Presidential Election: Not Red, Not Blue, but Green to win?
With a recent poll showing that 14% of registered voters see climate change as the most important challenge facing the country, victory in November may well hinge on the success or failure of the respective parties to own this issue. For context, such a figure implies that around 30 million voters could cast their ballots this Autumn with the environment at the forefront of their thinking – that’s two to three times as many as in 2016.
Of those who care about climate change, one-third describe themselves as ‘very progressive’, suggesting that it is the Democrats who have the most to gain from grasping the initiative on the environment.
Voters focus on green policies, but does Biden?
Despite this potential vote-grabber for Biden, the issue features only 25th on a list of policy proposals on the Biden 2020 website. His plan has three main avenues of execution:
- Reinstating Obama-era regulation through executive order
- Investing $1.7 trillion in green energy and jobs through an act of Congress
- Leading international treatymaking efforts on the world stage.
That’s a long way from the $16 trillion investment into the “Green New Deal” that Bernie Sanders was promising. Herein lies the dilemma which will ultimately decide Democratic fortunes this year – how can they appeal to the middle whilst also ensuring that their base turns up to vote? It looks like climate change isn’t a hill for them to die on.
Rebranding climate issues for rust belt voters
The electoral system also explains why the climate features so far down Biden’s list. The rust belt is a crucial cluster of states for both parties when it comes to grabbing electoral college votes, and many of these rely heavily on so-called ‘dirty industries’ for employment and prosperity. Pennsylvania is the main example of this, where Trump secured victory by less than 45,000 votes in 2016. As the third largest coal-exporting state in America, voters in this area may not react well to Biden’s green vision, allowing Trump to take home 20 crucial electoral college votes.
There is however an opportunity to re-brand green credentials as a wider vote winner. The climate issue is ripe for conversion into an anti-China policy, thanks to their role as global polluters in chief. With approval of China down to -40% in the wake of coronavirus, and Trump likely to leverage this sentiment in his own favour, the environment offers the Democrats a line of attack which can be employed without turning off their core base of support.
How will America’s Climate Policy shift after the US Presidential Election?
There are three main scenarios that could play out in the US Presidential Election.
Scenario One: Trump Wins a Second Term
With or without a Republican Congress, Pres Trump would likely continue to use executive orders to cut back the environmental regulations that were instituted by the Obama administration. So far, Trump’s repeals have included the moratorium on federal coal leasing and the extent to which federal agencies must take account of the environmental impact of their actions.
- This would benefit fossil fuel companies
Scenario Two: Biden beats Trump, and the Democrats gain Congress
In this instance, the Democrats would have carte blanche to deliver on all of Biden’s campaign pledges, including the $1.7 trillion of government spending. In the wake of coronavirus, huge government investment will be expected, providing the perfect cover for such a policy. However, with a majority only guaranteed for two years, and other objectives clearly taking priority, it is unclear whether a Pres Biden would deliver the entirety of his environmental agenda, even in the greenest of scenarios.
- This would benefit companies that can boost their green credentials
- It would harm “dirty energy” businesses
Scenario Three: Biden beats Trump, but the Democrats fail to capture the Congress
Here, Biden would have to rely on the power of executive orders and the office of the Presidency to implement parts of his climate proposal. As easily as Trump repealed them, Biden could reinstate Obama’s regulations. Also, he could use America’s status on the world stage to influence treatymaking and catalyse future climate accords. However, the $1.7 trillion investment in green energy and jobs is not possible without congressional approval, leaving the former VP with a half-delivered promise.
- This would be like half a heart transplant: the economic damage of regulation would be incurred, but without investment elsewhere to compensate
Despite any green rhetoric, the truth is that the environment simply isn’t a priority for the Biden campaign, and this is unlikely to change once in office. A New Deal might be in the offing to respond to the huge economic downturn, but it’s unlikely to be a very Green one.
How will the US-China relationship define the Presidential election?
Trump knows that antagonising China is a dangerous game. But in the run up to the election, it’s also a political necessity.
Before the coronacrisis, there was already a perfect storm of economic and security disputes brewing between the US and China. Covid-19 compounded all the existing issues as well as adding a whole new dimension to the rift. Tension is escalating on all fronts.
Phase one of the trade deal is dead. The promises made by China – purchasing at least $200 billion in US exports over two years – looked unrealistic from the get-go. But the virus means meeting phase one’s targets will be downright impossible. Throw in that China is already buying more from competitors (its imports from Brazil are up 35% on May 2019) even in an economic downturn, and any revival of the Trade Deal before the Election look dead and buried.
The tech war has entered a period of unprecedented turbulence. Trump continues to affirm that Huawei threatens national security, upping the ante in May when a new rule was issued barring Huawei and its suppliers from using American technology.
The Trump administration is reportedly exploring several measures that could punish China for its handling of the virus, including suing the Chinese government for reparations and cancelling US debt obligations to the country. Meanwhile, China has ordered its state-owned enterprises to stop purchases of US farm products after the US threatened to withdraw its special status treatment for Hong Kong – itself a response to China’s new security law for the territory.
The President was aiming to run his campaign based around strong economic performance, and failing that, a successful response to the pandemic. As both these options become increasingly difficult to achieve, China must serve as the scapegoat on which Trump can pin his administration’s failings.
Usefully for Trump, the American people aren’t too fond of the Chinese right now either. A Pew Research Center poll from April suggests that Americans have increasingly negative views of the country with two-thirds now holding an unfavourable opinion towards China.
This sentiment is widespread across a range of groups in America, which is unusual in an ever more polarised electorate.
A Republican ad campaign has been launched proclaiming, “One nation deserves the blame: China”, while the America First Action SuperPAC says it’s spending around $10 million on ads in swing states condemning Biden over China.
It’s rare for two thirds of Americans to reach such a strong consensus so inevitably both the incumbent and his challenger are attempting to burnish their anti-China stripes.
Each also believes they can use China to score personal points against the other candidate.
- Trump is quick to criticise “Beijing Biden” and his son’s alleged profiteering from Chinese business.
- A recent Biden campaign ad reads, “Trump rolled over for the Chinese. He took their word for it.”, and goes on to cite some of Trump’s early remarks praising China’s pandemic response.
This fight isn’t without its risks however.
- In May, Biden’s aforementioned ad sparked outcry from representatives of Asian American Organizations who accused the Democratic candidate of feeding the rise of anti-Asian racism in the US.
- For Trump, a new economic cold war would imperil any incipient return to growth not to mention leave it isolated when big global discussions take place. Hence the recent decision by the US Commerce Department to allow American companies to collaborate with Huawei on 5G technology standards.
As we know though, Trump is no stranger to risky political moves. With winning the election his top priority and alternatives running out, the President will hold onto the anti-China card for dear life to avoid being trumped by Biden.
The battle of ‘who’s tougher on China’ shows no signs of relenting. Both candidates will be forced to push harder and harder to have the last word on an issue which has galvanised such a strong reaction among the American public.
US Election Risk: Corporate Tax Rates
The passage of the Tax Cut and Jobs Act (“TCJA”) in December 2017 lowered the US federal corporate income tax rate to 21% from 35%.
This recent decline in tax rate has been a major contributing factor to profit growth for US companies. For example, S&P Global found that, since the TCJA was enacted, the median effective tax rates for information technology companies in the S&P500 dropped from 21.1% in the first quarter of 2017 to 15.5% in the same period of 2019.
However, Democratic nominee and former Vice President Joe Biden has proposed a partial reversal of the TCJA. The Tax Foundation sees the plan as raising the corporate income tax rate to 28%, reversing half of the TCJA cut.
With the 2020 US Presidential Election just five months away and prediction markets starting to price in an increased likelihood of Democratic victories in the House, Senate and Presidential races, it may be worthwhile considering if the market is pricing in the risk of an increase in tax rates.
Data source: Predictit.org “Yes Price”
In a note earlier this week, Goldman Sachs strategists saw the plan put forward by Democratic nominee Biden as reducing S&P 500 EPS by as much 12% in 2021, while this week has also seen the index trading with a forward PE multiple above 23, levels last seen around the time of the dotcom bubble.
Of course, much uncertainty remains about the specifics of any potential tax reform, as well as five more months of uncertainty before the election race is completed, which could ultimately remove the likelihood of any tax reform.
US Presidential Election 2020: The Coronavirus Election
The outcome of the US Election depends on who swing state voters perceive to be the candidate best placed to fight the twin health and economic crises. President Donald Trump has the advantage of incumbency and healthy campaign coffers, but Democrat Joe Biden polls well in swing states. This is Donald’s to lose, and Joe will be hoping to pick up the pieces.
President Trump’s management of the coronavirus crisis has highlighted the advantages of incumbency: he is the one that can actually do something. A recent poll showed that 44% of respondents thought Trump was the best person to manage the coronavirus, and only 36% responded Joe Biden. The latter has been kept out of the spotlight leading to a recent pitiful poll result that 42% of respondents were either “unaware” or “did not have an opinion” of his proposals for the pandemic.
Will Covid-19 damage Trump’s chances of re-election?
Trump’s approval rating is back to the highs of his Presidency, even as polling over his handling of the crisis remains in net negative “disapprove” territory. The way that voters weigh up their concerns over the health crisis versus the economic crisis will be of critical importance in swing states.
Here the polling looks less positive for Trump. 59% of respondents in Michigan qualified his pandemic response as “too slow”, as did 55% in Florida. As a result, general election polls have given Biden a decisive advantage, with 8-point advantages in Michigan and Pennsylvania, and a slimmer 3-point lead in Florida. This swing-state edge has consequently been reflected in national polls, in which he leads on average by 6 points.
However, these numbers must be read with caution: Biden’s lead is half what Hillary Clinton’s was in 2016 at this point, and his own shaky numbers over the handling of coronavirus will be put under strain once he goes through the scrutiny of an election campaign.
Despite these key swing-state leads, Biden has been unable to build the momentum necessary to make that lead more convincing. A credible sexual assault allegation has gained a lot of attention, and he has thus far failed to fully lock up the progressive left of the party, despite receiving endorsements from Sanders and Warren, which has translated in weak polling numbers with young voters.
Biden presidential bid faces pitfalls over running mate and campaign financing
Biden has the opportunity to boost his campaign by choice of running mate, but even that is laced with potholes. Klobuchar and Harris are too centrist for the Sanders voters and they blame brother Bernie’s woes on Warren staying in the race too long.
Biden already does well with minorities and the Midwest so the impact of Klobuchar/Harris would be minimal among those groups whilst confirming to the left that Biden will run a centrist campaign. In short, the process of selecting the VP will only re-open the deep divisions that exist within the Democratic Party.
Biden faces an uphill struggle given the financial constraints his campaign faces. As of the start of April, the Biden campaign had a cash deficit of $187m on the Trump campaign, which will be even more difficult to make up virtually and in the context of an impending recession.
This hasn’t stopped the Biden campaign from investing heavily in swing states: they have spent more than the Trump campaign in digital advertising in Wisconsin, Michigan, and Pennsylvania; despite this, they are being outspent in North Carolina and Arizona. These weaknesses could potentially be major roadblocks should they not be resolved, with virtual eyeballs ever more important now that so many people are just kicking their heels at home.
Will vote-by-mail expansion swing US Presidential Election for Biden?
In addition to the role the economy and Joe Biden’s momentum will play in the election, the conditions of the election itself will be incredibly important. Firstly, Justin Amash’s Libertarian bid for President, amidst questions of how third-parties can collect the signatures necessary to appear on the ballot, will likely play in Biden’s favour, especially in the key state of Michigan, which Amash, a former Republican, represents in Congress.
How voters will be able to vote in the context of the pandemic will play a crucial role too: some blue states have made vote-by-mail universal, while the measure has received resistance from Republicans.
This is likely because recent electoral results have indicated that expanding vote-by-mail favours Democrats, as the easy access to the ballot has increased turnout in their favour. This will be important amidst the many ongoing legal and political (both in statehouses and in Congress) battles over how to secure the vote in November.
Will Trump win over voters with renewed attacks on China?
The coronavirus has also brought new issues to the fore. Now that Trump is unable to run on the strength of the economy, he has pivoted to the issue of China. He is painting Biden as complacent with China, who he has repeatedly blamed for the coronavirus pandemic.
The heightened tensions between China and the USA will likely endanger their relationship, and push Joe Biden to adopt more aggressive rhetoric towards China. The diplomatic consequences could endanger their cooperation in the future, and push them into a neo-Cold War-esque rivalry.