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If Democrats Win, the Dollar Will Fall

  • Kathy Lien
  • 6 November 2018

Daily FX Market Roundup 11.05.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

One of the biggest political events this year is the U.S. Midterm Elections.Historically, these elections do not have a significant or lasting impact on the dollar or the financial markets but this year, given the controversy surrounding this Administration, we could see a meaningful reaction. For what its worth, the U.S. dollar traded lower against most of the major currencies ahead of the big event but it held onto its gains versus the Japanese Yen and Swiss franc which tells us that investors are not worried about a major disruption to stocks. Part of this has to do with the overall strength of the economy and their view that the Fed will stick to their plans regardless of tomorrow's outcome. Service sector activity remains strong with the non-manufacturing ISM index falling only slightly from last month's 21-year high. There are no major US economic reports due for release tomorrow, which allows investors to focus exclusively on the elections.

 

According to the latest opinion polls, the Democrats could take control of the House with the Republicans maintaining its majority in the Senate.However there are many close races so the House could swing either way. Here's how things could play out for FX - we know that dollar bulls like the Republican controlled Congress because it supports Trump's policies.   So if the Republicans maintain control of both parts of the government, the dollar will soar. USD/JPY could hit 114 and EUR/USD could break 1.1350. If Congress is split, with the Democrats controlling the House and Republicans the Senate, the prospect of legislative gridlock that would make it difficult for policies such as the President's middle class tax cut to pass is negative for the U.S. dollar. But in this case, the reaction should be short-lived. The most bearish scenario for the dollar would be if the Democrats win both the House and Senate, in which case, we should see a very aggressive slide in the USD that takes EUR/USD to 1.15 and USD/JPY to 112. To summarize -

 

Scenario 1 - Republicans win House & Senate - Bullish for USD (USDJPY 114, EURUSD 1.1350)

 

Scenario 2 - Democrats win House, Republicans win Senate - Mildly Negative for USD (USDJPY 112.50, EURUSD 1.1450-1.1475)

 

Scenario 3 - Democrats win House & Senate -Bearish for USD (USDJPY 112, EUR/USD above 1.15)

 

There's also a Reserve Bank of Australia monetary policy announcement this evening.The Australian dollar is trading firmly ahead of the decision and there's scope for further gains if the central bank focuses on the improvements. Throughout this year, the RBA has maintained a neutral policy stance and they have no reason to change this outlook. They believe that interest rates need to remain low to support the economy and that continues to be the case. For the time being, the Australian economy continues to fend off Chinese weakness. Although not many jobs were created in September, the unemployment rate dropped to a 6 year low. Inflationary pressures eased slightly in Q3, but retail sales, business and consumer confidence improved. Nonetheless, the RBA recently recognized the negative impact of Yuan weakness and slower Chinese growth and with activity easing across the economy (all 3 PMIs fell), they may want to make it clear that a rate hike is not on the radar. Considering that the Australian dollar is bid, AUD traders could have a bigger reaction to positive comments than negative ones.

 

The best performing currency today was sterling, which found its way back above 1.30.Although service sector activity slowed causing the PMI composite index to move lower, the market is clearly betting on a Brexit deal. No agreement has been reached and a number of EU officials have said that no major breakthroughs are expected this week. Our colleague Boris Schlossberg is right in sensing that "the market is clearly betting that a deal gets done. With 95% of the details ironed out and with a customs union and financial sector fungibility agreed upon it all comes down to the Irish border, which is frankly only an issue for hard-line Brexiteers. We have the feeling that PM May is going to tell her cabinet to "take it or leave it" and frankly with economy tanking and the prospect of tipping into a severe recession haunting policymakers, UK can't really leave it."

 

 

For more information, they can be reached at http://www.bkforex.com/.

 

The information, including Commentary and Trade Ideas, provided on BKAssetManagement.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. BKForex Advisors LLC and BKAssetManagement.com are merely providing this information for your general information. The information and opinions presented do not take into account any particular individual's investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite.

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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