Politics usurps economics to impact financial market

>> Currency market calm could be shattered by the US election

G10 economies appear rather uninteresting at the moment as most scrape out modest growth and the influence of monetary policy is stymied by the Fed’s inaction. This seemingly leaves traders and investors scraping around for currency influences while flogging the only trade in town – yen sales – for all it is worth in the meantime. But politics offers an escape route with three key elections ahead in France, the UK and the US.

In the Standard Bank’s view, the extent to which these elections could influence currencies depends heavily on the constraints and opportunities that are created by the political impasse. What do we mean by constraints and opportunities? The constraints arise because politicians in France and the UK appear petrified by global investor skittishness while the opportunities primarily lie in the US as leading politicians there take advantage of the fact that fiscal expediency is rarely punished by global investors given the US dollar’s hegemony.

Put another way, are European politicians too scared, and US politicians too gung-ho? For if this is the case we could actually find that all this political upheaval actually works out better for the European currencies and worse for the dollar. What evidence do we have for this? In the UK, it seems that the opposition Labour Party has been willing to impose such significant constraints on its room for financial manoeuvre that the transition from the (usually) more market-friendly right-leaning Conservative government to the left-leaning Labour Party on July 4^th will not only be seamless but very possibly a boon for the pound.

Tough fiscal constraints have already been promised, with the upside being that this will help avoid any post-election sterling pressure, but the downside being a likely continuation of moribund growth and poor investment opportunities for overseas investors. But, at least in the infancy of a (very likely) Labour government, the upside will probably beat the downside and that could help sterling appreciate.

>> How willl the UK and US elections impact currencies?

The situation is similar in France, for here there are not only the constraints imposed on any far-right led government from market pressure of the sort we’ve already seen in French bonds, but also the constraints imposed by being a member of monetary . Unless the far right want to ditch these EMU constraints by leaving the bloc (which is not being proposed) the shackles will be binding and National Rally (RN) has not only suggested that it will stick to these constraints, but do so with greater vigour than the present government. Like the UK, this too could mitigate any negative currency effect although traders and investors will have to trust that both Labour in the UK and the RN in France do as they say.

In contrast, US politicians must feel that there’s no such constraints. Of course, there’s no EMU-like constraint of the type faced by France, but is seems that there’s not even a market constraint as international investors continue to put up with things like the ballooning US debt load. What’s more, neither Trump nor Biden can truly promise fiscal responsibility because it is not up to them; it is up to Congress. That’s very different from the situation in the UK and France – and indeed other developed countries.

So far, the US dollar has not suffered for any of this fiscal largesse. That might be down to the fact that the largesse appears ‘well spent’ as US growth outstrips others. “We would worry when this advantage is reduced or even eliminated, for then the US might start to feel some of the constraints that its peers in Europe already have to deal with”, said the Standard Bank.