The Potential Impact of the 2024 US Election on FX Markets

How will the US election affect the FX market for global businesses?

The 2024 United States presidential election will be held on Tuesday, November 5, when voters will elect not only a president but also Congressional candidates for seats in the House of Representatives and the US Senate.

This year’s election started as a rematch of 2020, but that changed when President Biden retired from his campaign in July and endorsed his vice president instead. As a result, Kamala Harris might become the first woman in the history of the Republic to become Commander in Chief. However, she first has to beat Donald Trump, who hopes for a triumphant return to the White House. In either case, the winning candidate will become the 47th President of the United States.

At the time of writing, The Washington Post reports that Vice President Harris is still ahead of Trump by two points nationally, while her leads in the Midwest have stabilized. Donald Trump continues to lead in Arizona, Georgia, and North Carolina. Every state is within a normal-sized polling error of 3.5 points and could go either way.

Current polling is not wildly different from the presidential race four years ago, when the final Emerson College/NewsNation national poll before the November 3 election reported that former Vice President Joe Biden led President Donald Trump by 50% to 45%. Narrow victories in a handful of swing states determined the result then and probably will again this year.

Although there are only two nominees in the race, the outcome will not necessarily be binary. A third option could be a contested result. Trump may well challenge the election result in 2024 in much the same way he did in 2020. He has been seeding doubts about the integrity of the election for months and could continue after the votes are all in. It is worth noting that a January poll from PRRI found that 66% of Republicans believe the 2020 election was stolen.

Each of these three possible results has the potential to significantly impact global FX markets.

Potential effects of a Democrats win

It is likely that a Harris administration will largely maintain the status quo set by President Joe Biden. Despite Biden’s success in taming inflation, stabilizing immigration, and reducing violent crime, Harris promises to offer “a new way forward.” While her policies are not yet fully clear, these are the probable trends:

• Fiscal Policy Democrats typically favor increased government spending, particularly on social programs and infrastructure. This could lead to higher budget deficits, which might put downward pressure on the USD in the medium to long term.
• Monetary Policy While the Federal Reserve is independent, a Democratic administration might favor a more dovish monetary policy, which could result in lower interest rates for longer and potentially weaken the USD.
• Trade Policy A Democratic administration may pursue less confrontational trade policies, especially with traditional allies. While this is likely to reduce trade tensions, it could also potentially weaken the USD’s safe-haven status.
• Regulation Increased regulation, particularly in the financial and energy sectors, might dampen short-term economic growth prospects. Although this could initially weaken the USD, the long-term effects would depend on the overall economic impact.
• Tax Policy Potential increases in corporate tax rates could be seen as negative for US economic growth and might put some downward pressure on the USD.

Given the factors above, here are some potential impacts on major currency pairs:

EUR/USD The Euro could strengthen initially, as it may be seen as a counterbalance to a potentially weakening USD. The extent of this strength will probably depend on the Eurozone’s economic performance and European Central Bank monetary policy. Given that inflation in the Eurozone has now fallen below the 2% target, the ECB might consider slowing its rate-cutting trajectory, which could strengthen the Euro.

GBP/USD The GBP may see some strength against the USD, but this would likely be due to dollar weakness rather than pound strength. A less confrontational US trade policy might also benefit UK-US trade relations, potentially supporting the GBP.

USD/JPY As a traditional alternative safe-haven currency, the Japanese Yen might strengthen against the USD if there is perceived increased economic uncertainty from the US. However, if a Democratic win is seen as positive for global trade, it could weaken the Yen’s safe-haven appeal.

USD/CAD The Canadian Dollar might strengthen against the USD, especially if a Democratic administration is perceived as more favorable to Canadian trade. However, its performance also depends heavily on oil prices, given Canada’s resource-based economy.

Potential effects of a Republican win

In terms of economic policy, Donald Trump has promised to "end inflation and make America affordable again". However, analysts are sceptical about the likely effects of his proposed trade tariffs. What Trump says and what he does are not always the same thing, but these are the likely trends:

• Fiscal Policy Republicans typically favor lower taxes and reduced government spending. Such policies could lead to smaller budget deficits and potentially strengthen the USD.
• Monetary Policy Although the Federal Reserve is independent, broader economic policies can still impact central banks. Traditional Republican administrations have favored policies that could lead to a more hawkish monetary policy, which could result in higher interest rates, potentially strengthening the USD.
• Trade Policy A Republican administration may pursue more protectionist trade policies, increasing trade tensions, but potentially strengthening the USD as a safe-haven currency.
• Regulation Decreased regulation, particularly in the financial and energy sectors, might boost short-term economic growth prospects, which could also strengthen the USD.
• Tax Policy Potential decreases in corporate tax rates could be seen as positive for US economic growth and might put some upward pressure on the USD.

Given these factors, here are some potential impacts on major currency pairs:

EUR/USD The Euro is likely to weaken initially if the USD strengthen on expectations of pro-growth policies. The extent of this weakness would depend on the Eurozone's economic performance and ECB policy.

GBP/USD Sterling may see some weakness against the USD, although this would be heavily influenced by ongoing UK-specific factors. A more protectionist US trade policy might create uncertainty in UK-US trade relations, potentially pressuring the GBP.

USD/JPY The Japanese Yen might weaken against the USD if there's perceived increased global economic growth, but if a Republican win is seen as increasing global trade tensions, it could strengthen the Yen's safe-haven appeal.

USD/CAD The Canadian Dollar might weaken against the USD, especially if a Republican administration pursues policies that could impact Canadian trade, although this would be dependent on oil prices and energy policies.

Emerging market currencies

If a Republican administration follows its traditional, more protectionist trade policies, emerging market currencies might weaken against the USD, while higher US interest rates could decrease the appeal of higher-yielding emerging market currencies.

A contested result

Whatever the election results, they are likely to be contested.

There is potential for prolonged legal battles, driving political instability, which could cause short-term uncertainty and volatility in markets. Here are some critical considerations for anyone with interests in the US and internationally:

• Potential for USD fluctuations: A weaker USD could benefit exporters but challenge importers due to higher costs of imported goods and services. Conversely, a stronger USD could benefit importers but make exports less competitive.
• Increased need for hedging strategies: Businesses with significant USD income or costs should manage potential currency fluctuations to protect profit margins. Consider reviewing and potentially adjusting hedging strategies, as well as increasing hedge ratios for near-term exposures.
• Possible increased volatility in major currency pairs: Pairs like EUR/USD, GBP/USD, and USD/JPY may experience increased volatility, requiring businesses to stay agile and informed about market movements.
• Close monitoring of trade policies and regulatory changes: These could impact supply chains, international operations, and overall business strategy. Assess supply chain vulnerabilities to potential policy changes and review investment plans in light of potential regulatory shifts.
• Liquidity planning: Ensure sufficient liquidity buffers to manage potential volatility. Review credit lines and consider securing additional facilities if needed.
• Access to banknote/wholesale currency considerations: Especially for those with significant USD exposure, this might present opportunities for converting USD to other currencies, although timing and risk management are crucial.

These insights suggest that clients adopt a well-balanced, protective approach to FX risk management. Rather than attempting to predict election outcomes, it’s recommended to focus on hedging strategies that accommodate potential shifts in the dollar’s direction and magnitude, while leveraging structured products for participation and customization. Additional insights further support this approach, underlining the need to prepare for both immediate and longer-term implications of U.S. economic policies. Together, these perspectives advocate for a hedging approach to help navigate the anticipated volatility.

Disclaimer: These are general projections based on typical policy leanings. The actual impact would depend on the specific policies proposed and implemented, as well as global economic conditions at the time. As with any political event, it's crucial to remember that markets often price in expectations before events occur. Some of these effects might be seen in the run-up to the election, depending on polling and other predictive factors. Additionally, the actual policies implemented may differ from campaign promises, so ongoing monitoring and flexibility in FX strategies would be important.