US Elections: Clinton presidency would extend the FX indifference to politics – HSBC

Research Team at HSBC, suggests that for many years, the FX market has become used to largely ignoring US political developments.

Key Quotes

“Congressional gridlock, budget stand-offs, and debt ceiling debates have failed to get traction in an FX market more typically focused on monetary policy. This general indifference would likely continue under a Clinton presidency, in our view, especially if the new president faces a “gridlock” scenario with Republicans still in charge of the Congress. After all, this would simply represent a continuation of the status quo, where little legislation is passed.

Even if Clinton were to be president with a Democratic-controlled Congress, our second scenario, the currency implications would be modest. In either case, the initial reaction may be for risk-on currencies to rally on relief that the uncertainty of a Trump presidency had been avoided. The MXN would be especially reassured, in our view. The “bigger government” our economists envisage under a Democratic clean sweep could see the USD gain somewhat. Temporarily stronger US economic growth facilitated by a creep higher in budget deficits could prompt a less dovish Fed and may also be bullish for gold, especially if it pushes up inflation. But ultimately, the checks and balances in the US political system would ensure that sweeping changes to policy would still be few. Policy progress, in the face of likely delaying tactics by the opposition, would be slow. For the currency market, Clinton represents continuation.”