As of this writing, Intrade (the predictive virtual market) shows the probability of an Obama victory in the election at 68%. In contrast, the Bickers and Berry model , which has correctly classified presidential winners going back to 1980, shows Romney winning the election (with more than 300 electoral votes). In any case, the pertinent question is what impact the winner may have on FX markets in particular.
An insightful prism through which to gauge the potential impact is via regulatory changes. Legislation such as Dodd-Frank can, and has, significantly altered the landscape of the markets. Wholesale changes in trading practices, market structures and reporting responsibilities have been spawned even though substantial foot dragging—unintended and otherwise—has occurred. This has been due, in part, to the potential for leadership change as a result of the election. As an advocate of the legislation, Obama has staked his position for needed reforms in many different areas—separation of commercial and investing banking functions, greater centralization and transparency of OTC markets and so forth. With respect to Romney, other than campaign pledges to repeal Dodd-Frank outright there seems to be a paucity of policy prescriptions and delineated goals. He has been expressive regarding the economic impact of over –regulating markets and the need to roll back recent changes such as eliminating the proposed Volcker rule prohibiting bank from engaging in prop trading. Beyond that, it can only be assumed that the “less is more mantra” would be the guiding principle. However, this is not a guarantee that post- election Romney would necessarily follow this script as he has been inclined to moderate, change or reverse policy perspectives over time.
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The other potential impact relative to the FX markets would relate to the fiscal, monetary and geopolitical policies a Romney administration would pursue and the associated impact on the dollar. As an example, Romney has been vocal regarding his intention to replace FED Chairman Bernanke if elected. This would presumably include appointing a more hawkish replacement that would dial down quantitative easing tendencies. A Romney win and the attendant changing of the FED guard could lead to more uncertainty in the markets, more volatility, and risk off approach in the short term. Likewise, Romney has rattled his “currency manipulation” sabre toward China and promised immediate action to address the perceived inequity in the trading relationship. Again, this approach could be seen as disruptive to the market, creating uncertainties in the treasury and agency markets and thus lead to more volatility in the FX space.
Regardless of outcome, there are implications for the markets that are contingent upon which candidate wins today’s election. One outcome the market wants for sure is that a winner emerges clearly and decisively. A worst-case scenario would be a repeat of the Bush-Gore election cycle wherein the outcome was far from certain and ultimately ended up in the courts and dragging out on the national stage and negatively impacting markets in the process.