Mid-Terms: Will the Dollar rise on a Republican win or just do its own thing? Experts weigh in

• The Mid-Term Elections are right around the corner and markets are watching.
• Democrats are favorites for the House but nothing is certain.
• Experts differ on how markets will respond on election night and afterward.

Tension is mounting towards the US Mid-Term Elections due on November 6th. Democrats are favored to win the House of Representatives but the race remains tight.

We put three questions to six experts and received intriguing answers. We start with the first question: How do you think currencies will react to the mid-term elections in case Democrats flip the House and in case Republicans retain it?

Here are the other pieces:

• Are currencies more sensitive to trade, taxes, or other Trump policies? Experts have their say
• Mid-Terms: Can Democrats change Trump's trade policies? Experts are divided

Some see a significant reaction in case Republicans win while others see the US Dollar moving on other factors.

Joseph Trevisani

We start with our in-house expert Joseph Trevisani that explains why a Democrat win is priced in and why a Republican win can have a more significant impact. He then lays out the movements not only for election night but also for the longer term in case Democrats win.

Current estimates of the Democrats gaining control of the House are around 80 percent. The numbers vary from day to day, but the odds have not changed substantially over the past weeks. As such a Democratic House is priced into the market.  If the Democrats do win the fundamental economic, political and rates advantages of the dollar will not change. The U.S. economy will still be growing almost twice that of the EMU, Brexit and the Italian budget dispute will continue and the Fed is two years into a positive rate cycle, while the ECB struggles to end its liquidity support for the eurozone. Those disadvantages apply in descending order to the euro, the sterling, emerging markets and then the balance of U.S.pairs.

One long-term problem for the dollar and markets, in general, will not become important until the New Year and the Democratic assumption of control.  Several party leaders have promised non-stop investigation of the Trump administration and President Trump.  If they follow through on these threats, by no means a guarantee, the resulting distraction, and  drag on the administration's agenda could spill over into the markets and impact the dollar.

If the Republicans retain control of the House of Representatives the affirmation of administration's economic and trade policies and the ability to formulate and pass new items of the President's agenda should give additional support to the U.S. economy and the dollar. As this is not the expected political outcome the dollar and markets would likely get a surprise boost on election night.

Barbara Rockefeller

Barbara Rockefeller, from Rockefeller Treasury Services, also sees a Democrat win as priced in. She also looks beyond election night and toward a cabinet shuffle of the White House’s economic team and its impact on markets.

If the House flips to the Dems, traders will brush it off. Those who understand US politics will appreciate that the composition of the House may obstruct some of Trump’s policies, and that is a dollar-negative but not a lasting one, since most of what Trump does, he does by executive order and not using Congress. The tax bill was not actually Trump’s in the first place. It was always the plan of the House leadership. The response is not symmetrical, though. If the Dems lose the House, the dollar will rally on the assumption that Trump will become even more aggressive, with another tax cut, more deregulation, and more trash talk about trade. 

Many pundits expect a massive house-cleaning after the midterms, with a big change in advisors and cabinet secretaries. This is as likely as the election outcome to affect the dollar, especially if TreasSec Mnuchin and EconAdvisor Kudlow get canned. Mnuchin is hardly an admirable person but he and Kudlow are restraining the president on stupid remarks about interest rates and the dollar.

Dr. Woody Johnson

Dr. Woody Johnson, from the Online Trading Academy, also sees a significant impact from the elections on markets. However, he broadens his view and looks to historical market action around the Mid-Terms and sees a smaller effect than one would expect.

The currency markets will be closely watching the midterms. The balance of power in Washington could rock the world of markets both in policy and foreign relations. Markets loath uncertainty and the midterms will offer nothing if not uncertainty. It isn’t clear that the midterm, due to how they play out, you could see Republicans lose control of the House and the Senate. This would likely not be a scenario but if it happened it would probably be enough to derail the bull market. 

There are many pundit prognostications in the air not the least among them is seeing rough movements in midterm election years … since midterms traditionally see the Presidential incumbent’s party lose seats. They are also saying that historical performance shows that the markets, currencies as well, tend to do just fine as Election Day nears and in the aftermath of the vote, regardless of the outcome, as uncertainty begins to fade. Traditionally, the Big Boys (European Union, Britain, Japan, Canada, and China) have rallied from the end of August to the end of March around midterm elections. This time that includes a rocky start currently as marked by a median decline from the end of August through early October followed by a likely rally through year-end and into the next year. 

And, the rally in equities around midterm elections has been much stronger than the average returns seen in all other years.

Seasonal factors also provide a tailwind in the three-month period around midterms. After controlling for growth and seasonality, the magnitude of the performance attributable to the elections in the October-to-December period during midterm years is smaller than first appears.

Mike "Mish" Shedlock

Mike "Mish" Shedlock, from Sitka Pacific Capital Management, provides his in-depth analysis for the race, including the Senate. He then agrees with those who think a win for the Democrats is priced in but also provides a long list of other factors that move markets and finishes with a gloomy prediction for 2019.

I think it is likely the Democrats flip the house by a small margin and will do better than expected in the Senate.

As of Oct 22, the Real Clear Politics base scenario is the Democrats lose 2 in the Senate. I think it is more likely the status quo holds or the Democrats lose just one seat. They Democrats may even pick up a seat if Nevada goes their way. (I have Florida, Indiana, Missouri, Arizona, and Montana in the Democrat Senate column).

If the Democrats win either the house or the Senate, Congress becomes a lame-duck for fiscal policy. There will not be another tax cut. The question is “What’s priced in?”

I suspect a Democrat flip is priced in, and accurately so. There may not be stomach for a second set of tax cuts anyway, unless there is a Senate blowout.

Ed Ponsi

Ed Ponsi CMT, CTA, reminds us that the US Dollar did not rally under Trump and suspects some pundits are pushing their own book.

First, we must look at some facts. On election day, Nov. 6, 2016, the U.S. Dollar Index closed at 97.78. The dollar rallied sharply into the new year, and then spent over a year trending downward. As I answer this question, the dollar index trades at 95.7.

This debunks the notion of a strong dollar under President Trump. The U.S. Dollar Index is actually lower today than it was the day Mr. Trump was elected. One could surmise that the dollar “would have been weaker” had Trump not been elected. That’s possible, but it’s not a fact, just an opinion.

My point is, I’d be very skeptical of anyone who suggests any instrument will expand or contract under a particular political party. Such an argument is easy to make, but often doesn’t hold up under scrutiny.
I’d be particularly skeptical of anyone who pushes such theories. Such opinions are not always based on facts. In fact, they are often based on the desire to push a certain viewpoint. I think we should always consider the source of an opinion; is this person trying to push an agenda? Unfortunately, the answer is often “yes”.

The truth is, there are too many variables at work to say that X will occur if the Republicans or Democrats have more power.

John W. O'Donnell

And lastly, John W. O’Donnell, from the Online Trading Academy, basically says that the greenback will just continue doing its own thing.

In either case I expect DXY  to continue strong! This is still a trend to quality!