On the eve of the US elections, traders are anticipating an extremely close vote. With President Obama owning about 49% of the US vote, compared to Republican Mitt Romney’s 47%, there really isn’t an overwhelming favorite. The situation has led traders to consider additional factors that could affect the US dollar in the short term.
A Romney Win
Considered a less than spectacular opponent in the beginning of the race, former Massachusetts Governor Mitt Romney has come from behind and closed in on the once sizeable lead that President Obama possessed. The lead has sparked speculation of a Romney surprise win that could actually boost prospects for the higher beta currencies like the Euro and Australian dollar against the greenback in the short term. Why?
The short term outlook is primarily dictated by the upcoming discussions regarding the so-called U.S. Fiscal Cliff. The Cliff is simply an expiration of tax cuts and other provisions that will enact a broader $600 billion in government spending cuts and higher taxes beginning next year. This could be avoided if the government is able to reach an extension shortly following the elections. To this effect, a Romney win would lift market sentiment as the former governor would more than likely see those tax cuts extended. In comparison, President Obama has vowed to veto any legislation extending Bush-era tax cuts unless tax rates for higher income earners are increased. Ultimately, an Obama victory could mean an activation of the cuts, supportive of a potentially deeper recession in the world’s largest economy.
Revisiting The 2000 Presidential Election
With the narrow margin of victory that is expected in this election, some in the market are anticipating a similar outcome to the US Presidential elections of 2000. At the time, both former Vice President Al Gore and then Governor George H. W. Bush were locked in a race to the final tally. When all was said and done, the Texas governor was elected the 43rd US President. However, controversy over the election and its procedures overshadowed the Bush victory – even with Vice President Gore conceding defeat. The effects lasted for months following the ultimate electoral outcome. And, should things go awry again, it would muddle the US short term outlook and could place a bearish bias on higher beta currencies against the US dollar.
So, given the tight race that is expected in about 48 hours,traders won’t just be mulling over the candidates as much as how their potential victories will shape the monetary and political landscape. These effects will likely be felt for months to come.