Dollar’s fate linked to US economics, not politics

The volatile and acrimonious presidential contest may be an also-ran in the campaign to influence the US dollar. Traditional market preferences between Democratic and Republican policies will matter far less this year than the performance of the US economy.  If the recovery picks up steam expect the dollar to ride the wake. 

Join FXStreet senior analysts Valeria Bednarik and Joseph Trevisani for an examination of the dollar's political and economic nexus.

Valeria Bednarik: So, after the stalemate between the White House and Democrats over the next fiscal stimulus package, seems Democrats have given the first step towards an agreement, softening their demands for a more aggressive relief deal. Is that enough to reach an agreement of divisions that will prevail?

Joseph Trevisani: The specifics are still to be agreed but two things will drive it to a conclusion. The first is obviously the election and the second is the threat of executive orders.

Valeria Bednarik: Agreed, dropping money is a classic ahead of elections.

Joseph Trevisani: The House Democrats sought a number of non-economic relief provisions mostly on political issues, probably those will be eliminated. And yes, largess before an election is a tradition that goes back to at least to the the Roman Republic. In some cities in the US gifts to voters before an election, used to be called  'walking around money'

Valeria Bednarik: Happens everywhere...

Joseph Trevisani: At any rate I think a deal will come through in the next week or so. My guess is the threat of Trump's executive order was the key.

Valeria Bednarik: Anyway! let's say they reach an agreement. Whatever the rescue package amounts, it will remain a patch. Just today we saw unemployment claims back above 1 million. Quite a disappointment if you ask me, and painting an even longer path to recovery

Joseph Trevisani: I agree with the claims big disappointment. They are still down 23% from 1.435 million but the rise back above 1 million is worrying.

Valeria Bednarik: I mean, not a big deal, still far below the original 6 million per week. But still, the round 1 million figure broken previously for sure was a sentiment boost. Meanwhile, inflation picked up, which is also an encouraging fact.

Joseph Trevisani: Yes, but the 6 million in March is a dismal standard and the trend is still lower, but where are we headed?

Valeria Bednarik: I guess the market still can't see that we are not headed to "normal," meaning to back to where we were.

Joseph Trevisani: There are two more claims numbers before the August NFP.

Valeria Bednarik: Even if the pandemic ends, the vaccine appears, and all, we are not going back. There's a different normal ahead, and we are not clear about how it would be.

Joseph Trevisani: It is starting to look like that unpleasant term from the financial crisis...the new normal..is accurate.

Valeria Bednarik: Yeah, but remember, NFP stats are counted up to this week, so the next two weeks won't affect the result of the report

Joseph Trevisani: That is right. Yes, and the claims numbers may have an impact. Continuous claims have continued to decrease. Those are good news. I wrote a few weeks ago that there may be a two-track labor market. The hourly and lower-wage workers who continue to lose jobs as businesses fail from the weak foot traffic in so many places and the larger established business who are surviving or in many places prospering. By the way, I had my first restaurant meal in six months yesterday. Maybe things are looking up, but it was not a very good lunch

Valeria Bednarik: Lucky you. I read that over 50% of New York restaurants closed for good. Were you able to visit your favorite restaurant? Have you noted in the streets closed business?

Joseph Trevisani: It was not in NYC. Parts of Manhattan seem almost normal, I was in recently,the  residential areas.  It is mid-town and the financial district, the business areas that are empty. That should change in September if firms reopen their offices. But that is not guaranteed.

Valeria Bednarik: Oki, just curious about it. Maybe not the most accurate measure of an economic comeback, but for sure, closed shops are not a good sign.

Joseph Trevisani: Yes. NYC is not a good barometer for the country on any topic and not for economics. So far, at least the Democrats have not gotten the normal polling bounce from their convention, but that may be a function of its virtual space,  and the Republicans are unlikely to receive one either. The themes are pretty clear, the Democrats are running against Trump and Trump is highlighting the radicalism of Democratic politics and policies. Polls have tightened somewhat though the number of voters who claim to be undecided is small.  One topic which may assume much greater importance as the debates approach is Biden's competence, it is an unknown, one of the few in the contest.  His campaign has been very protective of him, but that cannot last. So far, the contest has not had any market impact.

Valeria Bednarik: Not that polls are reliable anyway. Could drive sentiment, but guess that's a lesson learned

Joseph Trevisani: I don't think the traditional Wall Street Republican preference is true this year, or perhaps in general.  Clinton received the bulk of downtown donations in 2016, but that may simply because she was expected by everyone to win. I agree. As unreliable as the polls were in 2016 I think they are even more so this year. Considering all the unrest, rioting and mayhem, my guess is that people are more reluctant than ever to tell the truth to pollsters.

Valeria Bednarik: And what about mailing vote? Would love to hear your view on that. Quite a conflict there too

Joseph Trevisani: The problem with the mail-in the vote is that any lists used to provide the addresses have large numbers of errors.  American move around a great deal. Any stray ballot could be opened and submitted.

Valeria Bednarik: I see... Yeah, doesn't sound too reliable.

Joseph Trevisani: Just to take the cynical view, it is being promoted by the Democrats and opposed by the Republicans. That tells you exactly which side expects to benefit.  I think we can discount both sides' protestations.  Clearly the Democrats expect mail voting to work to their advantage, whether honestly or otherwise is open to interpretation. I think the most telling impact on the election will be the economy. If there is an improvement in the three months to November, advantage Trump, if not, its a toss-up.

Valeria Bednarik: Yeah was thinking exact that, a long way to November. There are multiple factors that can change the current scenario.

Joseph Trevisani: My view has been that Trump's negatives and the man himself are known commodities, with little movement possible in views. Biden, Harris, and the Democrats are unknowns with potential negatives and positives. I think the campaign turns more on the Democrats than on Trump and the Republicans. The Democrats also have large negatives from the summers riots, which are exclusively an urban Democratic problem. Whether the  Republicans can effectively exploit that is unknown. I think the market is likely to remain agnostic through the campaign unless the Democrats take an overtly anti-business tone, which seems very unlikely.  Even if the party behind the ticket is anti-corporation they will not run on it. Trump won by the slimmest of margins, you could say because the Democrats and the Clinton campaign were overconfident and careless. That will not be the case this time.  Both sides are girded for war, the Democrats in the open.  How motivated the Republicans are is one of the great questions of the campaign.

Valeria Bednarik: I agree with that latest statement. Nobody believed in Trump and Clinton was overconfident. Both parts are on war, but there are also divisions within Republicans. I think that it is a major factor many are ignoring. And as you said, there are doubts about how motivated Republicans are, although I don't think they will prefer to lose and get rid of Trump, at least those that want him out of the picture. Back to the markets. The dollar is up. Stocks are down. The Fed was dovish. Is this dollar advance sustainable? Honestly, not for me. Is not that other economies are in a better shape, but that there's too much turmoil in the US at the time being.

Joseph Trevisani: Yes, I think the dollar rides on US economics. The recent fall was predicated on the slowing or reversal of the recovery, prompted by the initial claims jump in mid-July. If we get good numbers, the dollar recovers.

Valeria Bednarik: Oki, let's wait for those then!