The Forex Market and Presidential Terms
Matt Weller, CFA, CMT October 9, 2020 2:39 PM
How has the forex market performed around different US Presidential terms? Read on to discover what history can tell us about the Forex market and the President.
(1) The US Dollar and the President’s Party
At first, many traders are surprised to learn that there is rarely a direct, straightforward relationship between the President and forex market performance. But considering that the President represents just one branch of the US government, every currency pair involves (at least) an entire other country’s government, and that many of the most important market developments (cough COVID-19 cough) are entirely outside the control of a single politician, it starts to make more sense that the President is just one of many important factors to consider.
All of that said, there has been a consistent pattern of the US dollar strengthening under Democratic Presidents and generally weakening under Republicans dating back to the 1980s. As the chart below shows, Democrats Bill Clinton and Barack Obama presided over periods where the US dollar index generally rose, whereas George H.W. Bush, George W. Bush, and Donald Trump have all seen the greenback move lower under their leadership:
Source: TradingView, GAIN Capital
Viewed this way, a chart spanning over 30 years with seemingly obvious takeaways for the global reserve currency (buy/hold USD under Democratic Presidents and sell/short it under Republican Presidents) is impressive, but we would caution traders against reading too much into it. After all, holding a single trade for 4-8 years based on just one indicator would test most readers’ patience. More importantly, this entire sample size covers just 5 unique Presidents, so it may not be as significant as it initially appears. At a minimum, longer-term traders should keep this possible relationship in mind as one factor informing their outlook toward the greenback.
(2) The Current State of the Race
Despite taking one on the proverbial chin four years ago, polls are still one of the best tools to use to handicap the likely results in November (or at a minimum for insight into what the market is expecting). As of writing in mid-October, Joe Biden holds a strong nearly 10-point lead across an average of major polls, though President Trump still holds an advantage in the Electoral College and there's always the risk of a "polling error" like we saw in 2016:
(3) Election 2020: What happens next?
Looking ahead, forex traders must navigate many unknowns, from the path the COVID-19 pandemic carves out to the identity of the world’s most powerful politician come January 2021. While there is some historical evidence that a Democratic victory on Election Day could provide a tailwind to the US dollar, readers are encouraged to maintain a flexible mindset and avoid allowing their personal political leanings to impact their trading.
We’ve seen many elections across the globe in our 20+ year history, so no matter what November brings, you can trust that we will continue to offer the tools, support, and insights to help you navigate the markets in the months to come and put you in the best position to find success.
If you have any questions about how we can help you in your trading, please reach out today!
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.