Commentary: Will the Outcome of the US Presidential Election Move the FX Market?

Markets watch US presidential elections.  All the way back in 2000, the uncertainty around the result caused a large sell off of stocks on Wall Street which sent the Dow plunging.  (The dot-com bubble had also burst in March of 2000)  With the country charging towards the edge of the fiscal cliff, and the prospect of a lame duck Congress having to fix it, all eyes are on Washington.  Furthermore, slow growth, and overhang from Europe is weighing heavily on investor sentiment.  Here at FX-Fusion, it is our opinion that actors across the entire economy are still weary from the crisis of 2008, and for the past few years investors have been slowly wading back into the market.  Households are still deleveraging by aggressively paying off non-mortgage debt, and young people are renting because they are still afraid to enter a recently beaten down housing market.  The economy is growing, but despite this, the market is still looking for a clear signal which will either turn the bulls loose or bring in the bears, both of whom have spent the summer and fall waiting with baited breathe for any major news out of Europe .  So in this uncertain, directionless environment, market events matter more than ever.  Finally,   Mitt Romney has been pushing the "China is a currency manipulator" meme for months now, so I think that it is quite appropriate for me to share my thoughts on how the election next month may impact the FX market. 

What About China?

As President Obama correctly pointed out, USD/CNY has appreciated substantially since 2010.  The chart below illustrates this point.     

The Managed Appreciation of  the Chinese Yuan.  The People's Bank of China (PBOC) held the exchange rate with the US dollar constant for decade from 1995 to 2005 before allowing significant appreciation.  It reestablished the peg in 2008 to help its exports during the Great Recession.  In 2010, after significant nudging from the Obama Administration, China again allowed its currency to appreciate. 

 So the Reminbi (aka Yuan)  has already been allowed to rise against the dollar.  Sell USD/CNY, its a great carry trade with significant chance for further Yuan appreciation.  But as important as flexible exchange rates are for preventing trade and capital flow imbalances, it should be obvious to anyone that even if the Yuan were at parity with the dollar, it would still be attractive to ship jobs there because labor costs are so much cheaper.  In short, the only way to compete with China without bringing down real wages stateside (an adjustment that would take decades) is for US workers to gain more education and training so that they are many times more productive that their Chinese counterparts.  I am not the first or hundredth person to point this out, but it definitely bears repeating.  Labelling China a "currency manipulator" won't solve the massive trade imbalance.  Furthermore, since China is already allowing its currency to appreciate, doing only serves to antagonize the third largest economy in the world.    

Will a Romney Win Result in a Stronger Dollar? 

A well respected fund manager recently opined that an inevitable Romney victory will result in a stronger dollar on the speculation that Romney would appoint a more hawkish Fed chairman.  This very thought had crossed my mind a few weeks ago, back before the polls had tightened.  More hawkish language from the Fed, or the prospect of a tightening of monetary policy may cause temporary dollar rallies, but speculating on the election is foolhardy.  First, with national polls virtually tied and a slight Obama lead in the electoral college, the contest between Mr. Romney and President Obama is basically a coin flip.  Furthermore, a Romney victory may very well not move the markets because Ben Bernanke's term does not expire until 2014.  The prospect of an unknown Fed chairman being installed two years in the future is hardly a clear data point for the market to price in.  In short, spec plays based on the election are probably just gambling.  But if that is your thing, let me suggest going short AUD/USD on th prospect of further rate cuts from the RBA and the corresponding monetary tightening that would come with a new Fed Chairman.  

Parting Shot:  China is already letting its currency appreciate.  Speculating on  the election is foolish because the polls are tied and it is a distinct possibility that the result does not move the market.