USD traded lower against all of the major currencies on Tuesday. This broad based decline is a reflection of the market’s concerns about how the US political and economic landscape could change in the next 24 to 48 hours.
There are two Senate runoff elections in Georgia that will determine which party controls the Senate. Polls close at 7.00pm Eastern Time but if its very close, it may be hours or days before the final results are known. These Senate elections are important because they determine what type of policies will be passed over the next four years.
If Raphael Warnock and Jon Ossoff, the Democratic candidates win, the Senate would be tied 50-50 Republicans and Democrats, giving Vice President-elect Kamala Harris the tie-breaking vote. Under a Blue Senate, President-elect Joe Biden would have a much easier time passing a major stimulus package and fund it with higher taxes.
If Warnock and Offsoff win, look for a knee jerk sell-off in currencies and equities. If just one Republican candidate wins, currencies and equities should extend their gains. Over the past few months, stocks hit record highs on the expectations for a divided government that will keep taxes low and limit major policy changes.
On Wednesday, the Electoral College votes will be counted by Congress. This is normally a procedural affair that gets very little attention but this time, a dozen Republican Senators have said they will contest the votes in 6 swing states. The last time this happened was in 1887.
In order for a state’s vote to be officially recognized as an objection, there needs to be a written document signed by one member of the House and one member of the Senate. Then vote counting is suspended and both chambers will debate the vote and decide whether to sustain the objection and for the state’s vote to be dismissed, it needs to be sustained by both houses.
This has never happened in the history of the Electoral College. If even one state’s vote is officially objected preventing the 2020 election results from being certified, currencies and equities would sell-off in confusion.
The most likely scenario is that both votes end the way we expect them to. That means one or both incumbent Senators in Georgia retain their seats and Congress certifies Biden’s victory. These outcomes would reinforce the rally in equities and currencies. Japanese Yen crosses should benefit the most with broad based gains in high beta currencies. The US’ political drama will finally come to an end and investors can move onto new 2021 themes.
Wednesday’s FOMC minutes will take a backseat to all of these political developments. The Federal Reserve is dovish and there’s very little reason for their stance to change. The Australian and New Zealand currencies were the day’s best performers, which is no surprise given their impressive control of COVID-19 and summer recoveries.
EUR/USD rose above 1.23 on the back of USD weakness and stronger German data. Despite virus restrictions German retail sales and unemployment change beat expectations. Eurozone PMI revisions and inflation data are due for release tomorrow – none of these reports are expected to have a significant impact on EUR.
GBP also traded higher despite new lockdown restrictions. With a highly transmittable variant of COVID-19 raging across the country, Prime Minister Boris Johnson re-imposed some of their strictest lockdown measures as new virus cases exceed 60K for the first time ever.
It is estimated that roughly 1 in 50 people now have the virus in England. The new restrictions include closing all secondary and primary schools, issuing a stay at home order that only permits limited outdoor activities and preventing travel of any sort around the UK unless for non-essential reasons. These restrictions are expected to remain in place through the middle of February. GBP managed to shrug these measures off because the government also unveiled US$6 billion in new support for the economy.