Biden VS Trump: what are the implications for currency markets?
As President Donald Trump’s first, and potentially only, term comes to a close he leaves the USA in a much different geopolitical situation than when he took office in 2016.
A former international leader on many issues, Trump’s isolation of the US from some liberal geopolitical institutions such as the Paris Climate Accord and the WHO, his trade war with China and his cosying up to various strongmen such as Bolsonaro in Brazil, Putin in Russia and even Kim Jong-Un in North Korea, has done a lot to diminish the US’ international standing as an upholder of the liberal rules-based order.
While Trump’s initial victory was a shock that saw stock markets plummet and the Dollar to lose value, they soon rallied as it became apparent Trump’s domestic economic policies were favourable to both. However, as the coronavirus crisis continues to ravage America, Trump’s disregard for even the simplest of public health initiatives, like encouraging mask wearing, appears to be wearing thin for voters.
His opponent, Democratic nominee and former Vice President Joe Biden, has run a campaign largely built on staying reasonably quiet and letting Trump continue to stoke a decline in public opinion of him since the pandemic began. The strategy has been effective, with Biden slowly climbing in the polls since his nomination was announced earlier this year, with the gap widening to the point that many are predicting a Democrat takeover of the White House, Congress and the Senate.
Stock market investors are refraining from making any large bets as, after his shock victory in 2016, investors fear that despite a hefty deficit in the polls and important swing states, Trump remains enough of a wildcard that he could still pull a victory out the bag. However, markets are beginning to trend in the direction of a Biden victory.
One of the areas that Trump and Biden differ most is on foreign policy and, as a result, emerging market currencies are already beginning to move in anticipation of a Biden victory. Overall, a Biden victory would likely be a positive for these currencies, due to a comparative reluctance to making use of tariffs. However, a Biden victory would be particularly good news for investors in Renminbi, due to a likely lowering of tensions in the trade war, as well as South Korean Won and Mexican Pesos; but bad news for holders of Russian roubles, who have enjoyed some relief in international pressure with Trump as President; and even worse news for the already plummeting Turkish Lira, with Washington likely to take a tougher stance on President Erdogan increasing tensions with the Greeks and their interventions in Libya.
The story for currency markets is less clear. With the potential of a more effective, wholly Democratic legislature being able to pass more holistic and comprehensive stimulus packages, combined with a far less erratic Commander-in-Chief with a more measured and responsible approach to the coronavirus crisis, it is likely that confidence in the US as a market will increase. However, this may not necessarily lead to a strengthened Dollar, with previous stimulus packages resulting in depreciating Dollar value. Furthermore, an increased focus on trade from a Biden administration may encourage the Treasury to weaken the Dollar in order to give the US an edge in trade, so it’s worth keeping an eye on who Biden picks for key roles in his cabinet and any further policy announcements to judge the Dollar’s long term outlook.
Inversely, Trump’s recent reluctance to provide more stimulus could mean a strengthened Dollar in the case of his victory. Either way, the short to medium term future of the Dollar is very much up in the air until after the election.
One final note: due to the prevalence of mail-in voting this election, the election may not be called one way or the other on the night. As a result, expect some volatility in markets in the days between election day itself and a winner being announced.
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