US Elections: Blue Wave to extend USD decline and equities rally - Westpac

FXStreet notes that the outcome of the presidential election and the composition of Congress will have material implications for fiscal policy, the economic outlook and markets. Prediction markets and polls suggest a blue tide is the most likely outcome. As blue wave probabilities firmed the yield curve steepened, equities rallied and the safe-haven USD declined, though reduced odds of a contested election would have also been a factor. A blue wave election outcome should extend these trends into 2021 Q1, according to strategists at Westpac.

“Biden and Democratic Senate: A blue wave should see the USD ease via risk appetite channels, but substantial fiscal support could also shift the US outlook relative to the Eurozone and might bring forward the timing of Fed policy normalisation. That is an unambiguously bullish USD story. We assume risk appetite is the dominant driver in the short-term while the relative growth story would be more of a late 2021 or 2022 story. Markets should enjoy some relief over trade issues too. Biden has a protectionist streak but is likely to adopt a less confrontational approach to China. That should trigger Asian currency gains, though upside may be tempered by the realisation that any tariff reversal could be modest and slow in coming, if at all. Biden’s tariff stance has been ambiguous and confronting China is now a bipartisan issue. Biden may revise or phase out Section 232 steel and aluminum duties on the EU, Canada and Mexico, though not immediately. That, and a likely more conciliatory approach to traditional western allies, including a reduced threat of trade confrontation with the EU, may provide EUR with an additional short-term boost.”

“Trump and Republican Senate: Equity and fixed income markets are likely to price in a relatively less optimistic outlook under a status quo election outcome. The setback for risk appetite should boost the USD. Trump’s tariffs pressured the currencies of trade-dependent countries subject to them, by cutting the competitiveness of their exports to the US and trimming growth prospects. A second term Trump likely prompts a round of Asian currency selling. EUR/USD may be pressured too on expectations that Trump will shift his focus to Europe, long threatened.”

“Biden and Republican Senate: With a blue wave increasingly priced in, a Biden win and continued Republican Senate majority will likely prompt a setback for risk appetite - lower equities, lower yields and a lift in the USD. A smaller Covid relief bill is likely. Biden is likely to rely more on executive authority and rewriting of agency rules in this scenario. Biden would still have a freer hand on the international stage and hopes for reduced trade tensions should still underpin some modest upside for Asian currencies.”