News, AUD, Market Update

T-Minus one week: US Election final preview

With just over a week to go before the US presidential election polls point to a clear win for Democratic candidate Joe Biden. But recent shifts in US markets, from the US dollar to small-cap stocks, suggest that investors are starting to prepare for the Democrats to win not just the White House but both houses of Congress as well, in a so-called ‘blue sweep’.

Interestingly, market sentiment about a Democratic victory has pivoted markedly of late. Typically, Democratic wins are perceived as a path to higher taxes that dent corporate profits, drag equities lower and weigh on overall US growth. But in 2020 investors seem to be accepting that a ‘blue sweep’ would be the most favourable outcome for US economic growth, albeit USD-negative.

A Democratic sweep would all-but-confirm the rollout of a big fiscal stimulus package under Biden. Increased fiscal spending financed by long-term debt issuance would be net USD negative (more USD in circulation), but analysts expect US growth to improve under such a scenario as small and medium-size businesses receive much-needed cash injections. Better-than-expected US growth will send important signals about the potential recovery rate of the broader global economy, in addition to shoring up risk sentiment – boosting commodities and stocks. Typically, this dynamic means a weaker USD as global capital flows towards higher-yielding emerging market countries.

The US election coincides with a very important Reserve Bank of Australia meeting where it is expected that the RBA will cut interest rates from 25bps to 10bps and make some announcement about their QE programme. There is also some possibility that they expand their yield curve control mechanism, or the point where they are controlling government bond yields to, from 3-year to 5-year. The RBA uses yield curve control as a way to get borrowing rates a small bit lower for longer. To a degree the market is expecting some combination of these policies from the RBA already, however if they were to implement all three policies (rate cut, QE expansion, yield curve control) together it would likely be AUD negative.

But with the RBA meeting falling on the day before the US election it is probably the case that AUD-watchers will hold their fire until the outcome of the US election is more certain. But a ‘blue sweep’ accompanied by a mostly-as-expected RBA meeting is likely to give AUD a slight boost over the USD in the coming weeks. In the scenario of a contested outcome, with President Trump refusing to accept a loss and clinging to power, expect a chaotic USD sell-off and a sharp AUD rally.

If you want to be kept in the loop on AUDUSD exchange rate movements over the US election check out our rate alert feature. Simply set an alert for the AUDUSD exchange rate you want and we will email you when it reaches that level.