U.S. Dollar Eyes Midterm Elections Test

© Adobe Stock

- USD will be vulnerable to any "Blue Wave" at midterm elections.

- Democrat victory to constrain Trump administration, hurt USD. 

- Republican majority USD positive, analysts see USD/JPY higher. 

The Dollar is likely to remain on its front foot over coming weeks as the midterm elections draw closer, but the trajectory of the greenback into year-end and beyond will depend heavily on the outcome of the vote, analysts say. 

Americans go back to the polls on November 06 in order to determine the composition of the House of Representatives and, to a lesser extent, the Senate in what will be a crunch moment for global currency markets. 

There is a long precedent of incumbent presidents seeing support for their respective parties decline in the regular midterm ballots and speculation that President Donald Trump will suffer the same has been feverish this year.

Our democracy is in crisis. The president degrades the rule of law, spreads corruption, and discredits truth. Over the next three weeks, we all have a chance to turn back the tide. Here are three things you can do before November 6:

— Hillary Clinton (@HillaryClinton) October 16, 2018

"If one has a conviction in either tail of a Republican sweep or a Democratic sweep, USD/JPY and Japan equities should be considered as trading instruments," says Shusuke Yamada, a strategist at Bank of America Merrill Lynch. 

Japanese foreign investment into the U.S. is a crucial source of support for the USD/JPY rate, with Japanese investors long drawn to the U.S. by interest rates and stock market returns that have been far superior to those seen in Japan over an extended period of time. 

Yamada says the USD/JPY rate could trend steadily higher for at least one month after the vote regardless of the outcome but that the upward move would be much more pronounced, potentially endure for longer, if the Republicans win. 

Midterms matter for the Dollar more broadly because Republicans currently control both houses of Congress but have only a narrow majority that could easily be lost if voters plump for the Democrats.

It was Trump's agenda and Republican control of Congress that facilitated sweeping tax cuts that have driven the U.S. economy from strength to strength this year, even as the growth elsewhere in the world has slowed. 

Thank you Kentucky! #MAGA????????https://t.co/iCUqrQ91gF pic.twitter.com/xwsa1S2dIU

— Donald J. Trump (@realDonaldTrump) October 14, 2018

As a result, the question of how much longer the current Dollar rally can endure for will be determined in large part by the November 06 ballot. And given how the Dollar has bested all other currencies since April, the result will also matter greatly for global markets too. 

"With the US mid-terms nearly two weeks away, the USD should remain resilient. That said, the case for renewed optimism in the USD remains limited by the fact that the USD is already well loved and the notion that USD exceptionalism could be nearing an exhaustion point," says Mazen Issa, a currency strategist at TD Securities. 

Whatever you do, do something. These midterm elections are our last chance to defend our democracy. Let's win.

— Hillary Clinton (@HillaryClinton) October 16, 2018

Democratic Party leaders and stalwarts have claimed throughout 2018 that November's midterms will bring a "blue wave" to Washington that sweeps away the incumbents' majority. This would enable them to frustrate the republican agenda and potentially even get the ball rolling impeaching President Trump.

Republican rivals have been quick in pointing toward Trump's stewardship of the economy, which has grown faster in 2018 than it did in 2017 as other parts of the world have experienced a slowdown, and also been keen to flag pledges made on the 2016 campaign trail that have since been implemented. 

PROMISES MADE, PROMISES KEPT! https://t.co/2lk8Fjspe4

— Donald J. Trump (@realDonaldTrump) October 12, 2018

"Our US strategists think the upcoming election will be more consequential and the focal point is whether the Democrats can take either chamber," says Bank of America's Yamada. "We keep our USD/JPY and Nikkei forecasts for year-end at 115 and 23,500, respectively, based on the consensus scenario of a split congress. But with the recent market adjustments and flow for USD/JPY and fundamentals for NKY, risk-reward apparently favors upside for both USD/JPY and NKY."

A Democrat victory in November would make a second round of tax cuts and reforms much more difficult to move through Congress, while rendering efforts to repeal unnecessary regulations and reduce red tape for businesses all but impossible.

This means a Democrat victory would also be bad news for the Dollar and a successful Republican defence of their majority the greenback's only hope of maintaining the lofty heights it has climbed to in 2018. 

However, opinion polls have consistently shown the Democrats with a clear lead over the Republicans in recent months. 

Almost all of those same polls gave opposition candidate Hillary Clinton a clear lead going into the 2016 presidential election and although the new week has already seen Trump's own approval rating rise to its highest level since his election, the risk of a Democrat victory in November cannot be ruled out. 

"USD firmness in the last several weeks seems to be more deeply rooted in the notion of weakness elsewhere as opposed to USD exceptionalism, which may encounter a rude awakening should the mid-terms reveal a divided Congress," warns TD Securities' Issa.  

The Dollar index was quoted 0.35% higher at 96.02 Monday and is now up 4.01% for 2018 overall, after having completely reversed what was once a 4% first-quarter loss. The Pound-to-Dollar rate was 0.62% lower at 1.2974 while the Euro-to-Dollar rate was down 0.35% at 1.1469. 

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here