How to trade a Trump impeachment in 3 phases with the US Dollar

US President Donald Trump worked with Michael Cohen for 12 years. The personal lawyer was also a "fixer" that saved his boss from significant embarrassments, both personal and business. Cohen once said he would bite a bullet for Trump. But when push came to shove and the lawyer faced considerable jail time, he flipped against his former boss.

Cohen agreed to testify against Trump and implicated him in paying hush money to prevent former lovers from telling their stories, thus influencing the elections. Lanny Davis, Cohen's lawyer, took another step forward and said that Cohen knows of a Russian conspiracy and that there is "no dispute" that Trump committed a crime.

This is the most vulnerable moment for Trump's presidency so far and talk of his ousting is once again heard.  Markets already reacted with a small drop of the US Dollar. 

What's next? Will Trump be forced out of the White House? If so, how will markets react? 

Here are three phases for such a scenario that became more plausible today.

1) While Trump clings to power – a weaker dollar

The Watergate scoop broke out in 1972 and Nixon resigned only in 1974. We are living in a faster age, but things may take time. Trump and his colleagues will probably fight and the story will drag on in the press, in Congress, and across the world. These times are different in another sense: Trump is not Nixon. He may stay at the White House as long as possible.

During this period, we can expect the dollar to continue struggling. Markets hate uncertainty. Markets may fear that the tax cuts may be in danger and any kind of fiscal stimulus will be stuck. The greenback could continue undoing the late 2016 rally.

In addition, uncertainty about policy could keep potential investment on hold. Such a reaction is similar to the one seen in reaction to trade uncertainty: investments are postponed. The uncertainty could also result in cautious consumption by Americans, further slowing down the US economy. A drop in forward-looking consumer and business surveys such PMIs could turn out to be a self-fulfilling prophecy.

If things calm down, the dollar could gradually recover.

2) On Trump’s departure – extreme volatility

Assuming things will deteriorate and force Trump to abandon his post, we could see extreme choppiness. Uncertainty will reach its peak, but this may not necessarily result in a one-way move to the downside. Drops in the US dollar could be more common than rises, but the fast-clip of events around the resignation could result in air pockets, a lack of liquidity and wild moves.

Republicans currently control both the House and the Senate but they may lose the House in the mid-term elections. An impeachment process would begin in the House and would require a two-thirds majority in the Senate. If Democrats win the elections in November, they can begin impeachment proceedings in January. 

If House Democrats impeach Trump in the House, as Republicans did to Clinton, the Senate, probably controlled by Republicans, will unlikely move forward. 

A more realistic scenario would be of pressure from Republicans on Trump to resign to stop the political damage. With falling approval ratings for Trump and the party, the GOP may prefer to cut their losses and get ready for the 2020 elections with a cleaner slate.

3) First days of President Pence – a recovery

While losing the standard-bearer of the party is a huge political blow, Republicans will try to recover under President Pence. The current Vice President would be sworn in and will probably try to rebuild the party.

With many Republicans voters still loyal to Trump and the establishment against him, the process will take a long time. However, the Administration will enjoy relative stability. It is hard to see Pence behaving in a more erratic manner than Trump.

With stability restored, the dollar could begin the recovery. The day Pence is sworn in could mark the bottom for the US dollar. No, Pence may not attempt to bring on a new package of tax reform and infrastructure spending. Nevertheless, the relative calm and a functioning administration would be enough.

The euro zone's problems were not solved when Draghi made the “whatever it takes” speech in July 2012. The recession continued and unemployment peaked only in 2013. But, it marked the bottom of the crisis and the bottom for the euro.

Trump’s disgraceful disappearance from the scene will likely mark the bottom for the dollar.

More: Dollar Domination: 3 reasons why the Dollar remains King, and why it could fall in mid-fall