US Dollar Weakness after Cruz's Iowa Win highlights Possible 'Presidential Effect'

The first stepping stone to the up-and-coming U.S presidential elections could spell the start of a radical overhaul of economic policies which are bound to impact on the dollar. 

The results of the first caucus in Iowa have shown a win for the two ''mainstream' party candidates - Senator Ted Cruz for the republicans and Secretary of State Hilary Clinton, for the democrats.

These two candidates propose less protectionist, more neo-liberal economic policies compared to Trump and Sanders who both agree on slapping imports on - or at least getting tough on - Chinese and other foreign imports.

The Dollar Index has responded to the news by falling, which broadly backs up our theory that the protectionist agenda of the mainstream candidates is likely to strengthen the dollar, by lowering imports and therefore lowering the trade deficit.

In the case of a win for the less protectionist candidates, the dollar would be expected to weaken - as it has done since the Iowa news - since their policies are less likely to lead the U.S to be isolated.

Their more moderate, mainstream economic policies are also likely to help stocks - which are inversely correlated to the dollar, and visa versa for the wild-card independents, under whom we are likely to see stocks fall, since both Trump and Sanders want to clamp-down on the power of corporate America, although particularly Sanders.

Nevertheless, the next caucus in New Hampshire is likely to be won by Donald Trump and Bernie Sanders, which will lead to a four horse race and little clarity on who will reign supreme overall.

It's also interesting to consider that according to research there is strong evidence to suggest that stocks perform particularly poorly during the first year of a president’s term, because it is then that they unleash all their unpopular policies in the hope that they will be forgotten by the time of the next election.

The research, which was conducted by Yale and Hirsch, seems to indicate a propensity for further upside in the dollar following the elections in November, and perhaps doubly so if a non-conformist candidate is elected for the reasons explained in this article. 

Recent Polls show Outsiders Ahead 

The most recent pan-America polls are showing Donald Trump is likely to win the Republican nomination and there is a close race between Hillary Clinton and Bernie Sanders for the Democratic nomination.

If it comes down to a choice between Trump and Sanders at the presidential election, some have argued that in strange way their their radical economic policies actual resemble each other in quite a few ways

This would guarantee, regardless of who won, the almost certain implementation of policies which would have a major impact on trade and the economy – and therefore the dollar.

Although Trump represents the right of politics and Sanders the left, both, for example, believe in a protectionist trade agenda which would slap import tariffs on Chinese products, making them more expensive and boosting the competetive edge of U.S products. 

Both are critics of corporate tax evasion and 'rapacious' CEOs, both think immigration forces down wages in certain sectors of the economy and therefore should be restricted, and both believe in free healthcare (although they differ on what form it should take). 

In addition, both believe in higher taxes for the rich, although they differ in the detail and magnitude.

As a recent article on website vox.com said:

“Billionaire Donald Trump would seem an unlikely candidate to challenge this market liberal framework, but he is an outlier in a Republican Party that had become a bastion of free market economics.”

The article adds:

“Sanders opposes trade agreements that he believes encourage American companies to invest overseas rather than at home, and wants to close tax loopholes that would allow "corporate deserters" to avoid American taxes. Like Trump, he promises to be tough on China.”

Whilst:

“Trump attacked corporate "inversions," when a company relocates its headquarters overseas in order to avoid taxes in the US. And he declared that Wall Street: “has caused tremendous problems for us. We’re going to tax Wall Street.”

Why this Matters for the Dollar

The main issue with the dollar and the potential election of either Trump or Sanders, is both men's protectionist policies, which could impact positively on the dollar because in the short-term tariffs would increase the price of imports which would reduce demand for imports, as Americans would opt for cheaper U.S-made products, and therefore lead to a reduction in the trade deficit.

Longer-term, however, the impact of these policies on the dollar, could be negative, as protectionism often reduces the competitiveness of domestic companies by unfairly advantaging them over foreign competition, who conversely are required to become ‘sharper’ to compete.

This can therefore lead to a slow-down in the economy which can weigh on the currency.

Economists might also become concerned with the impact of the positive welfare reforms and higher taxes on the rich – and in Sander’s case speculation as well – which would also be considered negative for the economy from an establishment neo-liberalist perspective.

Latest Polls

Current polls suggest Donald Trump has a clear lead over his main Republican rival Ted Cruz in New Hampshire, whilst Hillary Clinton is in a close battle with Bernie Sanders in the Democratic race.

A highly respected Iowa poll conducted on January 30th by Ann Selzer showed Republican nominees are led by Donald Trump with 28%, Ted Cruz with 23% and finally Rubio with 15%.

On the Democratic side, Hillary Clinton led the Selzer poll with 45%, followed with Bernie Sanders with 42%, whilst the third candidate has only 3%.

According to an article in vox.com, “Selzer has a very good track record in polling the caucuses,” adding:

“Selzer.. seems to be an expert at both modeling turnout and picking up on this late movement, as her track record shows.”

“In 2008, when everyone else's final Democratic polls were mixed, she went against the grain by finding Barack Obama up by 7 points — and then he won by 7.8 points. She called the Republican winner that year, Mike Huckabee, too.”
Notable successes also came in 2004 and 2012.

The most recent polls for the presidential election, however, are actually showing Trump and Sanders now moving out in front of the others.

A poll by the Boston Herald on the 1st February, for example, shows Trump in front by a massive 25 points (Trump 38, Cruz 13, Rubio 10 and Bush 10) and Sanders ahead by 20 points (Sanders 57, Clinton 37).

What are the Iowa and New Hampshire caucuses?

Caucuses are ‘assemblies’ or ‘gatherings’, and involve people getting together to provide their backing for different presidential nominees on a specified evening.

They are relatively casual, rustic affairs lacking all the beaurocracy and red-tape of elections or the more modern primaries, which involve members voting, or ballots.

Democrat caucuses are different and much more complicated to Republican ones.

Normally the gatherings are held in community centres: church halls, town halls and schools.

Caucuses only happen in a handful of states, those that don’t have them normally use an alternative system.

The reason they are so important is that virtually no president has ever been elected who has not won either of the two first caucuses in Iowa or New Hampshire.