With less than a day until the US presidential election, traders are placing their bets on a likely outcome. While the polls and bookies still show a victory for Democratic nominee Hillary Clinton, a nasty email scandal might obstruct her path to the White House. In other words, GOP candidate Donald Trump still has a shot, leaving many in the financial markets worried about volatility leading up the November 8 election.
Below we look at how the currency markets could behave in the event of either Clinton or Trump getting elected.
Hillary Clinton as President
While it would be tempting for investors to use Hillary’s husband Bill for guidance on how the US dollar might perform under her tenure, the female Clinton is inheriting an entirely different economic climate. As analysts rightly note, it is Federal Reserve Chairwoman Janet Yellen – more than Clinton – that holds the key to the US dollar (and by extension, the currency markets).
There’s little reason to believe Clinton wouldn’t be supportive of the Fed boss, who would like to continue raising interest rates. Therefore, a Clinton presidency might have minimal impact on the Fed, allowing it to gradually raise interest rates in lockstep with improving economic data. This will boost the US dollar over time.
However, the US dollar might experience short-term volatility against the Canadian dollar and Mexican peso – two currencies that are highly dependent on US demand. As major trading partners, both currencies stand to benefit from existing trade policies – something Clinton is likely to continue supporting.
Research by the Brookings Institution also found that the loonie performed exceptionally well after the first presidential debate, where Clinton was widely believed to have won by a landslide. Brookings concluded that a Clinton presidency could lead to a 10% spike in the Canadian dollar.[1]
Donald Trump as President
This is where things get awfully difficult to predict. With a background in business and media, GOP candidate Donald Trump has little political experience and virtually no ties to special interests. Combined with his unconventional rhetoric, these factors make Trump a political wildcard. In the world of finance, “wildcard” isn’t a term that’s taken lightly.
The GOP candidate has also made it crystal clear that he favours lower interest rates, which could spell bad news for the dollar bulls. “I’m a low interest rate person. If we raise interest rates, and the dollar starts getting too strong, we’re going to have some very major problems.”[2]
Trump has also been vocal about renegotiating or even cancelling trade deals he deems to be unfavourable to the US. He has singled out China as a trade relationship he would like to reform. Rather than strengthen the dollar, these actions may actually lead to weakness, as major powers would look to renounce US policy by unloading greenbacks. A falling dollar may push more investors into the euro, which is the only currency big enough to rival the greenback.[3]
Of course, all of this is speculation. The myriad of forces at play make predicting the currency markets based on the president a difficult ordeal. As policies shift and economic conditions evolve, it’s anybody’s guess how the currency markets will perform under Clinton or Trump.
[1] James Ferreras (October 25, 2016). “Canadian Dollar Could See Big Gains If Hillary Clinton Wins.” The Huffington Post.
[2] Kate Davidson (September 12, 2016). ‘Donald Trump’s Shifting Words on Interest Rates and Janet Yellen.” The Wall Street Journal.
[3] Matthew Lynn (September 14, 2016). “Opinion: This is how a Donald Trump presidency would affect the dollar, gold and China.” Market Watch.
