Dollar and Euro’s Election Year Unique Trading Behavior
Daily FX Market Roundup 01.02.20
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
On this first official trading day of 2020, we want to take a look at the most important / influential event of the year – the US Presidential election. From rewriting the US/Canada/Mexico trade deals to imposing harsh tariffs on the US and other parts of the world, President Trump’s policies reshaped the global economy. While he can take credit for presiding over record breaking moves in US stocks, his policies also led to slower growth across the globe. Another 4 years of Trump and the US could have drastically different relationships with many countries. However that’s not our immediate concern because the Presidential battle could lead to one of two outcomes – policy freeze or an aggressive attempt by Trump to push through another tax cut before the election.
It will be interesting to see if the House impeachment of Trump affects his reelection bid. There have only been 2 other Presidents impeached in the history of the US. Andrew Johnson who served only one term and Bill Clinton who was impeached towards the end of his second term.
Historically, the US dollar tends to perform well in election years. In the last 4 decades, the dollar index has only depreciated during 2 election years and the sell-off in 2012 was nominal. During this same time, we see a strong pattern for the euro, which fell in 9 out of the last 11 election years. So while history does not always repeat itself, based on past performance, there’s a good chance that 2020 will be another good year for the greenback. The best way to capitalize on this information is to overweight long dollar, short euro trades this year and analyze short dollar, long euro trades more carefully before taking positions.