Election Week and the Dollar

November 2, 2012

Hurricane Sandy hijacked the marketplace this week, and the U.S. election is likely to do the same next week.  With attention riveted on all facets of the storm from its ultimate cost to a report card on how key politicians handled matters, the dollar posted net movements of less than a half percent against the euro, Swissie, yen, sterling, and Canadian, Australian and New Zealand dollars.  It’s become a common response for currencies to flat-line in the face of distracting and uncertain new information. 

The U.S. election is liable to exert a similarly muted immediate effect on currency markets.  Unless consistently close polls are widely unrepresentative, it should take at least a week and probably longer for political pundits to paint a sufficiently complete picture of the next Federal government for market players to commit to new investment strategies.  The majority belief based on the peculiarities of the state-by-state, winner-take-all method of selection has been that Obama will emerge victorious.  If Romney becomes the apparent winner, there will be an element of surprise, but that will not be the case if Obama is reelected.  A third outcome is that like in 2000, it takes several weeks to determine who won. 

Unexpected outcomes are the lifeblood of shifting investment strategies.  Newly directed capital flows lead to new configurations of interest rates and exchange rates.  An irony of the post-2007 world is that events, whether expected or surprising, have not dampened uncertainty to a sufficient extent for a compelling new equilibrium to emerge.  Weathermen a week ago sounded the alarm of a perfect storm between Washington and New York, yet the implications of Sandy remain murky on numerous fronts.  One of these concerns how the storm will affect Tuesday’s election. Beyond the identity of the next president of the United States, the answers to many questions that investors seek will not be at hand a week from now.

  • Who will hold key posts in the next administration such as the Secretary of State and Treasury Secretary?
  • Who controls the senate and house, and what are margins of their control?
  • How will the outgoing lame duck congress approach legislation to modify the punishing fiscal cliff that looms if no action is taken?
  • Will announced voting results have a taint of fraud, which is often a problem in close contests and will be augmented this time by weakened infrastructure in storm-stricken areas?
  • Will the next president take a different approach than outlined during the campaign? 
  • Some pundits have opined that bipartisanship is forever dead in the water with President Obama, but apt to reemerge under Romney, who has proven adept as a political chameleon?  Will Romney smoothly backtrack on controversial pledges to name China a currency manipulator, scrap Obamacare on day one and neuter the Bernanke-led Federal Reserve until a more conservative replacement can be installed as Chairman? 
  • When will the Romney administration specify which tax deductions are to be eliminated?  Will proposed tax rate cuts be modified?
  • To which interest groups that bankrolled super-PAC contributions will the next president be deeply indebted? 
  • Will Tea Party leaders dictate the agenda of a Romney Presidency?  Will social issues on immigration, same-sex marriage, or abortion sidetrack him from prioritizing fiscal needs.  Will his learned skills in the private sector help or hinder this career move into the federal government?
  • Will Obama steer a more centrist course than during his first term?  Will he get more personally involved in negotiations with congress than during his first term?  Will he say no to his own party’s left wing? 
  • Will the perennial second-term jinx, often marred by abuses of presidential authority, afflict the Obama presidency, too?
  • How will the U.S. economy appear to be performing from Election Day through the inaugural on January 20 and beyond into the first 100 days of the next administration?  How might those impressions reshape policy decision-making from what the candidates intended to do?
  • How will the new Chinese government react to a more aggressive U.S. policy stand?

The United States is not the only act in town.  Europe’s recession seems even more deeply entrenched in the fourth quarter as it was was this past summer.  Japan is slip-sliding into a downturn.  Emerging markets haven’t picked up the slack in the way they did in the Great Recession.  With economic growth of 2.0% annualized between 2Q12 and 3Q12 and 2.3% over the last four reported quarters, the U.S. economy has performed discernibly better than those that stand behind the euro, yen, or sterling.  Similarly lower commodity prices meanwhile suggest that commodity-sensitive currency such as the kiwi, Aussie dollar and loonie ought to be depreciating more sharply than they have.  Until proven otherwise, one inference to draw is that high uncertainty is trumping perceived fundamental differences and confining major currency pairs to comparatively tight trading bands.  That’s why I don’t expect a major shift to occur next week and why I suspect that current choppy conditions to keep prevailing for a good while.

The dollar is hovering comfortably around 80 yen but hasn’t escaped the gravitational force of that level.  Likewise, the euro has thus far been more comfortable trading near $1.30 than $1.25 in spite of much that can still go wrong with fashioning a plan to boost the competitiveness of its troubled links and to reduce their fiscal deficits.  A showdown looms next week over Greece, Spain still hasn’t requested outside aid, and yet the euro was as firm as $1.2950 earlier today.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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