Here's What a Biden Presidency Means for USD...
Its been a rough week for USD so far.
Monday was fairly flat but on Tuesday we saw big USD downside on anticipation for a big Biden victory. On Wednesday we saw a big USD reversal, with USD boosted on a strong early election night performance for Trump in the Southern swing states, only to sell off as markets realised this likely wouldn’t be enough for him to get re-elected. And today, we have seen an extension of yesterday bearish reversal, with USD now testing October lows amid an ongoing acceptance that Biden is White House bound.
DXY has already swung from highs above 94.00 to lows as deep as 92.50, but more volatility could lay ahead, especially if the FOMC opt to surprise the market with more easing tonight, or we get 100% confirmation that Biden will be the next President – As things stand, he is only 6 electoral college votes away from the Presidency, and so only needs to win one out of the remaining five major swing states yet to be called (and he leads in Arizona and Nevada).
The classic “Biden is negative for USD” argument goes something like this; Biden is likely to pursue less protectionist foreign policy, which ought to be good for global growth (and so good for EMFX, CNY and the likes of AUD, NZD and CAD). When global growth does better, USD typically does worse given its safe haven status.
With risks to US and European growth in the form of the rapidly spreading virus growing (which one could argue is USD supportive) is, however, going to keep the FOMC dovish for longer (which is USD negative). Which one overrides the other, as in, who wins in the battle between virus risks and the dovish FOMC remains to be seen, but the FOMC already won the first fight back in March (DXY is down in the 92.00s from March highs of nearly 103.00).
Perhaps a more important consideration is political dynamics in the US once Biden takes the helm in January; ok Biden looks likely to have won the Presidency, but the Democrats are already bitterly disappointed by their (almost certain at this point) failure to win back a majority in the Senate, and having their majority shaved down in the House. That means Biden won’t be able to implement his flagship fiscal policies (huge multi-trillion fiscal spending package, tax hikes for corporations and the rich etc).
What does this mean for USD?
Zerohedge argues that markets are aggressively pricing in a large expansion of the FOMC’s QE programme in 2021, with US economic growth now set to be more sluggish in 2021 amid a smaller fiscal stimulus deal (the Senate will not agree to something huge like what the Democrats wanted and, with the election over, the Democrats will have to compromise).
They attribute this as to why we have seen such aggressive downside in USD and upside in stocks and US bonds this week.
A fair argument. This kind of move is exactly the kind of market reaction you expect to see from a dovish FOMC (USD down, stocks and bonds up).
In my opinion, the rally in bonds is more about the anticipation of lower supply in 2021; after all, a smaller fiscal stimulus package that is palatable to the Senate Republicans means less issuance of new debt, and lower supply equals higher price, as with any market.
Meanwhile, the move in stocks I am not sure can be completely pinned to QE expectations. It seems, more than anything, to be a relief rally in wake of the election, markets literally saying “thank god that’s over”… which is why when Biden gets confirmed, there could be more upside, as it will actually be over (assuming Trump fails in his attempts to get recounts etc… which he may not!! In that case, things could get choppy again).
Alternatively some have argued that stock upside is due to a realisation that a Senate controlled by the Republicans is a good thing as, though it stops the kind of huge fiscal spending the Democrats want, it also prevents stock negative hikes to corporation taxes.
Either way, you can debate the causes of the upside in stocks and bonds, and even make arguments that stocks should be lower (some argued that a split Congress should have triggered a stock sell off prior to the election, which it hasn’t), but no one is arguing that the outcome is USD positive.
Given the above, most also think a Biden presidency is not going to be getting much more USD positive any time soon either.
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