The 2020 US Election is shaping up to be one of the most important ever, with the whole world waiting to see the outcome. The impact on sharemarkets and FX might be massive in the short-term, as markets adjust to the various outcomes in the presidential race and Congress. However, the longer-term differences between Joe Biden and Donald Trump on trade, geopolitics the economy might be less than expected.
For FX markets, the continuity in major policies is likely to be critical and could support the NZD into 2021.
While Trump was well-placed in most polls in early 2020, the impact of the COVID-19 pandemic (with the US leading the global tally for much of the year) has seen his support in polling drop.
Uncertainties around the result and the accuracy of polling, remain. Nevertheless, it is important to consider how a Joe Biden presidency could differ from the last four years – or, how surprisingly similar it may be.
China tensions are here to stay
A Biden administration may continue to pursue many of the Trump Administration’s policies on US-China relations. China has become increasingly focused on using its ‘soft’ power to achieve its geopolitical aims, and tensions about geopolitics and security are likely to remain elevated as this issue has grown beyond the US political factions. In fact, Jeffrey Bader – a former security advisor to President Obama – has said, regarding this: “There is a consensus for toughness…who wants to be seen as soft”.
Both political parties in the US have expressed negative views about China and it is one of few issues that both sides can agree on. Traders can expect to see this continue, reflected in what could be a period of sustained volatility in both the USD and the Chinese Yuan. We do not anticipate this easing anytime soon – no matter who is elected in November.
Globalisation is on the backburner
As for trade, the pre-2016 stance on globalisation does not look like it will be making a comeback, even under a Biden administration. The previous Obama administration may have advocated for free trade agreements, but much like tensions with China, distrust in globalisation is something that has grown around the world. It is not just a topic that resonates with the American right wing.
Free trade agreements are unlikely to be as popular with voters as they once were, and this could become an important concern for the UK as it looks to reach an agreement with the US.
The NZ dollar is traditionally closely tied to expectations for global growth and trade. A Biden win might not see a quick return to a focus on free trade agreements. This can pressure the NZD in the short-term as this news-flow drives markets.
More directly for NZ businesses, a Joe Biden presidency might not see a quick return to the failed Trans-Pacific Partnership after the US pulled out in 2017. The public mood on free trade agreements has moved on since it was proposed in 2016 under President Barack Obama. (The agreement continued without the US after President Trump withdrew, as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership)
Expect big spending and a lower USD
COVID-19’s impacts continue to unfold, and this is expected to ripple in the coming months and years. For instance, we can expect increased spending from a Biden government to help stimulate the economy. While this is already occurring under Trump, the Democrats have proposed trillions of dollars in further stimulus and relief packages. It remains a point of tension in Washington and is currently playing out in U.S. stocks as investor uncertainty kicks in.
A new policy regime from the Federal Reserve, outlined in late August, will now focus on ‘average inflation targeting’. It signals that US interest rates are likely to stay low for the foreseeable future. These low rates usually mean increased spending, both from government and consumers. This is already putting pressure on the US Dollar, and we could see it weaken further as we head into 2021.
A more manageable, predictable market
Trade tensions together with fiscal stimulus could mean that the USD is likely to remain low, whether the White House stays red or goes blue. However, we believe a Biden presidency could lead to a sightly steadier USD. While it would remain a volatile currency, Trump’s leadership style and spontaneity has led to even more unpredictable ups-and-downs during the past four years. This means a Biden presidency could allow Kiwi businesses an ability to plan with a little more confidence when buying or selling in USD.
We’ll be watching with interest when the results start coming through on 4 November (NZ time).
The short-term impact on markets might be massive – especially if the result is delayed or contested. Over the longer term, however, policies on trade, geopolitics, economic stimulus, and monetary policy might continue to weigh on the US dollar and support the NZD/USD.
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