USD to weaken if Democrats takes two US Senate seats in Georgia – MUFG

FXStreet reports that as economists at MUFG Bank note, the main event risk for financial markets at the start of the New Year is tomorrow’s run-offs for the two Senate seats in Georgia which will prove pivotal for the balance of power in Congress.

“If the Republicans win one or both Georgia seats, they will retain a slim majority in the Senate. If the Democrats prevail in both seats, however, there will be a 50:50 split in the Senate, giving incoming Vice President Kamala Harris the tie-breaking vote.” 

“One of the biggest market reactions is likely to be in the US Treasury market if the Democrats exceed expectations and take both seats. It would open the door to a much bigger fiscal stimulus package under incoming President Joe Biden which would increase upward pressure on US yields in the year ahead and could increase the risk of another taper tantrum like event later in the year when the US economy expands more strongly after vaccines have been implemented. At that point, market participants may start to question more seriously whether the Fed’s unprecedented policy easing is still required.” 

“In the short-term, the prospect of US fiscal stimulus is likely to be welcomed by risk assets as it would help to strengthen the global recovery. It should ensure that the US dollar continues to weaken for now even if US yields move higher. In contrast, the market reaction should be limited in the Republicans hold on to control of the Senate.”