The Impact of the US Election on Foreign Currencies

October 29, 2020 14:35

Over the last few weeks there have been many articles about what will happen to the US markets after the election on 3 November.

But the US economy is the biggest in the world and one of the most open. As such, what happens in the US will have a large ripple effect on other economies. As they used to say, when the US sneezes, the rest of the world catches a cold!

Whilst Republican presidents are often seen as good for Wall Street, Donald Trump has taken a confrontational and protectionist stand with respect to imports into the US. As well as tangible measures, Trump's aggressive rhetoric and unpredictability has had an additional significant negative impact on trade with other countries.

The main target for much of this has been China but other countries have been caught in the crossfire.

Countries like Singapore, Vietnam and South Korea are enmeshed in the supply chain centred on China – owning factories on the Chinese mainland, or supplying components or services to Chinese manufacturers.

As China has suffered, so have the economies of these other Asian countries. Mexico has been another target of Trump's measures and aggressive rhetoric.

With a Biden victory looking likely, the currencies of all these countries have strengthened over the last few weeks. Expect them to experience a more significant rally if Biden wins.

Depicted: Admiral Markets MetaTrader 5 - USDMXN Daily Chart. Date Range: 14 May 2020 - 28 October 2020. Date Captured: 28 October 2020. Past performance is not necessarily an indication of future performance.

Two currencies that will probably move in the opposite direction are the Russian rouble and the Turkish lira.

President Putin of Russia and President Erdogan of Turkey are both regarded as "bad boys" in international geo-politics. President Trump is known to admire these "strong leaders" and has ignored their actions in places like Syria, Ukraine, and now, Nagorno-Karabakh – behaviours that past US presidents would have tried to deter.

Both currencies have weakened in recent weeks in expectation of a Biden win and a tougher stand from Washington against Moscow and Ankara.

Depicted: Admiral Markets MetaTrader 5 - USDRUB Daily Chart. Date Range: 12 May 2020 - 28 October 2020. Date Captured: 28 October 2020. Past performance is not necessarily an indication of future performance.

The Turkish lira is currently trading at an all-time low against the US dollar, crossing the 8-per-US dollar line for the first time on the 26 of October.

Again, expect these trends to accelerate if Biden wins.

One other potential effect from the election might reinforce the rise of the first set of currencies.

If the Democrats end up in control of the presidency and both houses of Congress, we can expect a swift and decisive stimulus package.

Whilst this might be good for the US economy, it will probably be bad for the dollar and, thus good for other international currencies.

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