USD: Presidential election beginning to have more impact on the FX market - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has weakened modestly in the Asian trading session following yesterday’s first US Presidential debate.

Key Quotes

“Several snap opinion polls have signalled that Hillary Clinton was judged to have won the debate triggering some initial relief amongst investors which has helped to boost high yielding and emerging market currencies in particular the Mexican peso. A snap poll of 1,000 debate watchers from Public Policy Polling found that 51 percent thought that Hillary Clinton had won compared to 40 percent who though that Donald Trump had won. The latest odds from the betting markets have also shifted to price in a higher probability of Hillary Clinton becoming President. Market participants will now be watching closely the incoming polls in the week ahead to see if the first Presidential debate has had a material impact on the publics’ voting preferences.

Recent polls have been showing a narrowing of Hillary Clinton’s lead over Donald Trump ahead of the first debate which has contributed to the financial market’s increased sensitivity to the upcoming Presidential election. We continue to believe that the US dollar is vulnerable to the downside particularly against the yen in the run up to the election. Investor unease over Donald Trump potentially becoming President could begin to weigh more heavily on USD/JPY reflecting heightened concern over a shift to more protectionist trade policy, and the potential negative impact that increased policy uncertainty could have the US economy which would likely prompt the Fed to delay resuming rate hikes until next year.

The Fed came under fire again from Donald Trump in yesterday’s Presidential debate. He stated that the Janet Yellen led Fed was being more political than Hillary Clinton in keeping interest rates low. He has previously stated that he would replace Fed Chair Yellen when her term expires in February 2018. After the initial negative reaction to Donald Trump becoming President, the US dollar could begin to derive support if policies adopted including looser fiscal policy help to lift US yields. However, we doubt that the US dollar would strengthen initially if Donald Trump is elected President apart from against currencies of countries which could lose out from more protectionist trade policies including the Mexican peso. Fed Vice Chair Fischer is scheduled to speak later today which could have an impact on the US dollar although it is not clear that he will comment on the monetary policy outlook.”