Wednesday, 7 November 2018

DO THE MID-TERM RESULTS CHANGE ENOUGH TO ENCOURAGE A SELL-OFF IN USD?

The reality of the outcome from the mid-term election results that Democrats will take control of the House while Republicans hold the Senate has not created too much volatility for financial markets.

Investors were reasonably well positioned for this outcome before the event, therefore it hasn’t been as much of a nervous few hours for investors as some political events have been in recent history. The USD has edged gradually lower against many of its counterparts over the course of this week, with this related to expectations that the Democrats winning some influence could provide some legislative resistance towards Trump further pushing forward pro-America policies. 

The eventuality that the Democrats have fallen short of achieving a “blue wave” has prevented the worst-case scenario for financial markets from occurring. It was always going to be a long shot due to its unlikely probability, but there were concerns that the Democrats winning control of the Senate would have ramped up the chances of President Trump being impeached. This would have been the most unfavorable outcome for investors despite its low probability, because it would have run the risk of sparking wild financial market volatility and potential black swan events. 

What matters moving forward is whether this change of play represents enough uncertainty around political “gridlock” that it will weigh on the USD. The Greenback itself remains at historically very strong levels and does appear overvalued against many of its global counterparts, however it is not clear whether this result will create enough change to foreign and trade policy decisions that it would encourage investors to seriously unwind USD positions.             

At the moment we do see some near-term pressure on the USD but the jury is very much out for how long this could last. This depends on whether a shift in power could actually influence Trump's policies from being passed through legislation.

The Greenback has edged lower against most of its counterparts in Asia at time of writing, and this form is being replicated across most of the G10 as European trading is set to get underway. But investors would need to see some fundamental shifts that the outcome in the mid-terms could really change matters behind the scenes to receive the needed encouragement to drag the Greenback further lower moving forward.

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