Republicans don't Trump on the dollar: OCBC

WITH the US elections looming, a Trump presidency is not necessarily better for the US dollar (USD), while a Biden administration may not be as USD-negative as believed, OCBC Treasury Research said in a research note on Friday.

Rather, the administration that can deliver further economic support quickly and decisively should be the one that is USD-positive in the near term, foreign exchange strategist Terence Wu said.

In his note, Mr Wu said he found the approach that relies on the typical political inclinations of the winning president to be unsatisfactory.

He challenged the heuristic that a Republican president is generally USD-positive due to the party's political leanings. This assumption is based on the perception of the Republican Party being better at managing the economy and playing a harder line on the foreign policy front, Mr Wu wrote.

"Generally, US macro outperformance (due to better management of the economy), coupled with rising Sino-US tensions (due to hardline foreign policy) tends to result in a firmer USD," he said. "Thus, it is not difficult to find analysis that concludes that a second Trump administration is a net positive for the USD."

However, Mr Wu said analysis of the movement of the trade-weighted USD in the 30, 60 and 90 days after each of the last 10 elections suggests no systematic advantage for the USD under a Republican president.

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"If anything, on a 90-day horizon, it does seem that the lifting of any political risk premium due to a reduction in uncertainty post-election tends to be a marginal USD-positive driver," he added.

Any semblance of a consistent relationship also breaks down if the analysis is extended to a longer horizon of between six and 24 months after the elections.

Mr Wu said a "better way" to approach the matter was to look at current USD-negative drivers, which he identified as market-perceived pessimism around the pace of US economic recovery.

Aside from a resurgence of Covid-19 cases, this pessimism was in part due to stalling fiscal relief package discussions, especially in contrast with a game-changing relief package by the European Union, he added.

Hence, the administration that is USD-positive in the near term depends on whether a Biden administration or a second Trump administration is better positioned to deliver economic support quickly and decisively.

Mr Wu noted that the Democrat majority in the House of Representatives is not subject to change this year, while polls are calling for a Democrat majority in the Senate after the upcoming election.

Hence, at least in the near term, the ability of a Biden administration to work through Congress and obtain a new fiscal stimulus package for the US appears to be higher than a second Trump administration.

Mr Wu said the "sweet spot" may be for a Biden administration, coupled with a wafer-thin majority for the Republicans in the Senate, given potential market shock over the policy implications of a fully Democrat-dominated political infrastructure.

He added that in this setup, the hope is for the politically experienced Mr Biden to convince a few Republicans to support any short-term fiscal package.

The further assumption here is that other typically Democrat policy inclinations such as tax cuts are less likely to come to fruition.

"This should be sufficient to fuel some near-term optimism for the USD," Mr Wu said.