How Midterm US elections will impact on emerging markets

Trader

The midterm elections in the United States will impact not only on the American markets but also on the emerging markets. If the Democrats can recapture the Congress or if the Republicans manage to maintain the majority in both Houses, the emerging currencies will accumulate heavy losses against the dollar. 

How the midterm US elections could affect the forex market?

Federal, state and local mid-term elections in the United States will be held on November 6, 2018. The results that will catch the eye of the investors are the ones at the federal level. These elections, in a certain sense, are going to be the major test of the management of Donald Trump. According to expert’s opinions, there are three possible scenarios that merit consideration.

Scenario 1: The Republican Party loses its current majority in the House of Representatives, but retains the Senate

In this possibility the democrats would take control of the House of Representatives. This scenario is highly probable. A divided Congress would hamper the advance of Donald Trump’s legislative agenda and could provoke a negative initial reaction on risk assets.

This would suppose transitory losses for the emergent currencies, in a short term. In the medium term, however, a Democratic victory in the lower house could lead the Donald Trump Administration to adopt a less aggressive position on the trade front.

This decrease in aggressiveness could limit the effects of trade wars (such as the current conflict with China) by strengthening China’s economy and consequently, other emerging nations, creating more appetite for the assets of these countries.

Scenario 2: The Republican Party maintains control in Congress

In this event, they manage to keep the majority in the House of Representatives and in the Senate. Democrats remain in the minority. This result would be interpreted as a signal of approval of Donald Trump’s government and would undoubtedly reinforce its protectionist stance on trade policy, increasing tensions with China.

Likewise, this event would generate expectations that the next Republican Congress would be able to approve a new fiscal reduction through the process of reconciliation and that the process of deregulation would advance more rapidly. Case number 2 would be accompanied by strong sales of emerging assets due to the possibility of greater commercial tensions globally and a more aggressive monetary policy by the federal government.

Scenario 3: The Democrats, somehow, manage to recapture the majority in both houses of Congress

This is the most unlikely event according to the polls. A congress under democratic control would derail the plans for a new round of fiscal stimulus, cause a legislative impasse in Washington and could launch a serious blow against Trump. This scenario will produce strong episodes of volatility and risk aversion. Wall Street could cause big losses and a negative trend in developing markets.

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