With the Iowa caucus bringing the November US elections into scope for global investors, the January edition of the Mark-Up examines the potential election outcomes and what they will mean for global FX.

1. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
Elections Threaten Political Risk In 2024
2022 and 2023 could be effectively characterised as years where investor concerns were largely
centred around economic risks, notably fears of central bank policy mistakes or consumer
pullbacks. This was entirely logical: a global hiking cycle was underway, with rates in most G10
countries rising at decade-high speeds despite a lukewarm global growth outlook and record
global debt to GDP ($300tn or 349% of global GDP). Concurrently, major military tensions such
as the Ukraine conflict showed no sign of abating, whilst a tiring consumer was increasingly
saddled with the responsibility of driving growth across major economies.
The 2024 story is somewhat different however - 2024 is set to be a year where investor
concerns are dominated by geopolitical concerns, with this being the key tail risk for global
investors. Recently, in Bank of America’s Global Research fund manager survey, 89% of
respondents said geopolitical risk is above normal. Whilst ongoing conflicts in Ukraine and the
Middle East continue to represent noteworthy areas of interest for investors, political risk is
poised to come to the fore as perhaps the key theme of 2024.
2024 will play host to the largest election cycle in history with an unprecedented 75+ elections,
with this exceptionally busy schedule seeing nearly half of the world’s population (49% or 4.2bn
people) participating in national or major regional elections. Elections in Taiwan last week
marked the start of this cycle, which will build towards the most significant event of the calendar,
the 60th US election on November 5th.
Given the influence of the US elections, it is an event that will meaningfully impact global
markets across all major asset classes, including FX, fixed income, and equities. Within last
month’s report, just under a year out from the final election, we flagged the event as an
increasingly important driver of FX performance going forward, with the theme now rapidly
coming into focus on global investors’ radars.
This report will be split into two sections. The first of these will evaluate the current US electoral
landscape, providing context over where we currently stand before weighing up pathways to
nomination on both the Republican and Democratic fronts. The second half will then look at
potential election scenarios and identify the FX-related impacts of these various outcomes,
focusing across a variety of transmission channels.
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2. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
US Elections: Outcome Pathways
The 2024 US election looks increasingly likely to be a re-run of the 2020 presidential election,
which saw Joe Biden triumph over then-President Donald Trump. Early indications suggest that
Biden will secure the Democratic nomination virtually uncontested, whilst early polling places
Trump in a formidable lead within the Republican party race. Last Monday’s Iowa caucus proved
a marked demonstration of the strength Trump still commands, strengthening the notion of him
as the favourite for the Republican candidacy as we head into the primary season.
Democratic Nomination
Starting with the incumbent party, the Democratic Party’s election story is likely to be somewhat
less exciting, with current President Biden all but set to receive his party’s candidate nomination
- for context, in modern US history a sitting president has never lost a primary nomination.
Whilst this consistency of historical precedent makes other outcomes on the Democrat side little
more than a marginal improbability, it is worth giving brief thought to a scenario in which Biden
doesn’t win or potentially even seek the Democratic nomination.
An important consideration when looking at the first of those scenarios is Biden’s significantly
low current approval rating. Heading into the end of 2023, Biden’s approval stood at 39%,
making it the lowest at the same point compared to the last seven presidents. Even in the cases
of Obama (43%) and Trump (45%), both widely divisive figures, their approval ratings were
notably higher. Previous leaders had approvals above 50%. Worse still, since late summer of
2021 Biden’s approval numbers have continually worsened, with no form of respite. If there was
ever to be a factor worthy of prompting review of automatic nomination for the incumbent,
Biden’s historically low approval rating would certainly be it. Another slim possibility is the
scenario in which Biden decides himself not to run, potentially due to the nature of his age. At
81, he is the oldest sitting president to be seeking re-election, having already been the oldest
president by 8 years at the time (78 years old) of his initial election.
Yet despite these marginal possibilities, the Democratic party looks set on awarding Biden the
nomination and backing him to secure a second term in office, with rhetoric out of Biden’s own
team equally suggestive of him preparing to take up the mantle.
Republican Nomination
The Republican race represents far less of a foregone conclusion and is worthy of greater
attention given the wider dispersion of potential outcomes. Given such, the Iowa caucus last
Monday was hugely informative in helping to further estimate the respective likelihoods of
success for the various candidates, along with confirming the accuracy of early polling figures. A
crushing Trump victory - one in which he won over 50% of the total vote and all but one of the
state’s 99 counties - confirmed the tight grip he has managed to retain over his party’s voters.
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3. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
Such a resounding victory propelsTrump significantly ahead of his fellow candidates, rapidly
solidifying his status as the presumptive nominee - a scenario which his rivals will be desperate
to avoid.
Of the Republican field, Nikki Haley, the former Governor of South Carolina (2011-17) and then
US ambassador to the UN (2017-18), offers the most credible challenge. Despite having polled
just 19% in Iowa, Haley is well-placed to perform strongly at the next primary in New Hampshire.
Haley’s campaign had never banked on Iowa being a key source of support given Iowa’s highly
conservative, evangelical Christian voter demographic, with her lack of campaign funding
expended there reflective of this; by contrast, the New Hampshire demographic of more centrist
voters alongside independents constitutes a far better match for her brand of traditional
conservatism. Haley’s optimism for New Hampshire, bolstered by the endorsement of the
Governor Chris Sununu, has seen her essentially bet it all on success in the state including the
majority of her campaign funding.
For Haley, a strong performance in New Hampshire is crucial to build momentum. Winning in
this state is essential, followed by maintaining a performance on par with Trump’s in her home
state of South Carolina. This would keep the door open for her candidacy come March’s Super
Tuesday. In New Hampshire, a key swing state, she currently polls 34% of the vote behind
Trump at 48%, meaning she will need to significantly outperform opinion polls to achieve victory.
Given her already incredibly narrow existent pathway and the reported conditionality of
campaign funding on a compelling performance, a weak showing in New Hampshire could all
but confirm the end of Haley’s run. Even if she delivers above expectations in New Hampshire,
the following primary poses an equally formidable challenge; despite Haley calling South
Carolina home, it’s a state where Trump leads polling (57% vs 26%) and enjoys the support of
the current governor plus both the state’s senators.
The third candidate worth mentioning is current Florida Governor, Ron DeSantis; once regarded
as the main challenge to Trump, his campaign appears all but over following a weak showing in
Iowa (21%). Underperformance of expectations in a state which offers a tight demographic and
values match, and where he allocated the majority of his finances, means that a weak
performance in New Hampshire (5%) would certainly see him drop out not longer after. A
DeSantis dropout would be a boost for Trump, with a likely endorsement to follow and his voters
moving to back Trump rather than Haley.
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4. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
Polling averages for Republican candidates
Source: FiveThirtyEight, FT
Worth noting is that Iowa has been a historically bad metric of predicting the outcome of other
primaries, only identifying the eventual nominee of either party just 5 times in nearly 50 years,
most recently at the turn of the millennium. With that said, it seems increasingly probable that
Trump will secure the Republican nomination given the tight pathway to victory for Haley whilst
virtually non-existent route for DeSantis, and this constitutes our base case view. For the
remainder of this report, given our base case view combined with prediction market pricing,
scenarios will be modelled under the assumption of Trump as the eventual Republican
candidate.
Presidential Election
At this stage, a re-run of the 2020 Biden vs Trump election looks the most probable outcome.
The likelihood of a return to power for Trump is being increasingly priced by prediction markets,
with Trump re-election odds having continued to increase since Autumn.
US presidential election probabilities
Source: PredictIt, MUFG
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5. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
In early end-of-year polling, Trump also led at a national level along with several key swing
states, despite his margins in Arizona, Georgia, Pennsylvania and North Carolina as having
narrowed since a previous poll in November. Upcoming primary results will also serve as
important barometers of grassroots support for Biden within various swing states and will help
the market to re-price election probabilities, as Democrat appetite for his candidacy is better
tested. Our base case remains an electoral college victory for Donald Trump, with a low
conviction call on this coming despite a popular vote defeat.
Looking more broadly at elections inclusive of Congress, the Republicans are expected to take
back control of the Senate, whilst the House of Representatives looks to be a closer call. Only
around ⅓ of seats in the Senate are up for election, with 23 (including 3 by Independents who
caucus with the Democrats) held by Democrats and 11 by Republicans; in the House of
Representatives, currently controlled by the Republicans, all 435 seats will be contested.
Senate seats House of Representatives seats
Sources: Macrobond, MUFG
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6. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
FX Impact - Presidential Outcomes
With the expectation that the US elections will continue to grow as a core driver behind asset
performance broadly speaking and as a key catalyst for bouts of volatility, FX will be no different,
with a wide range of implications for global currencies across the DM and EM spaces.
Biden Victory
While not our base case outcome for the presidential election, it is worth briefly considering the
impact of a Biden victory on FX outcomes. Such would almost certainly prove to be a lower
volatility event, given any additional policy changes would be a far less significant shift from the
current regime. Downside risks for potential tariff-exposed currencies (covered in greater detail
below) would likely be curtailed. Despite the Biden administration leaving Trump-era tariffs at
elevated levels, these have already been priced into relevant currencies by the market, requiring
further escalation in order to deliver further downwards re-pricing. The main theme of a Biden
win would be around fiscal concerns, with a budget deficit that has almost doubled since 2016 in
GDP terms representing a structural headwind for USD. Yet, deciphering the impact of such will
also rely largely on the outcome of congressional races and the eventual composition of the two
chambers (covered in FX Impact - Congressional Elections section below).
Trump Victory
A Trump victory certainly poses the greatest volatility risk to FX, with the expectation that a slew
of bold policies would follow his inauguration. Given Trump’s previous spell in office, global
currency markets will look back to his 2016-20 term as a playbook for the FX reaction function to
his potential election and presidential session.
Worth noting is that Trump’s arrival into office in 2016 came against a very different backdrop. At
the time, initial broad-based USD performance was strong, supported by US yields climbing on
the expectation of a Fed rate hike cycle through 2017-18. In December 2016, USD put in a local
top before selling off, continuing to move sharply lower through 2017 as the market grew
increasingly optimistic over global growth prospects and investor sentiment improved. However,
this sell-off didn't last long, fading fast by the start of 2Q2018. From then onwards, despite
Trump continually expressing a preference for a softer USD - to aid US economic
competitiveness via cheaper exports - USD remained robust for the remainder of Trump’s term,
driven by catalysts such as Trump’s China trade war and correspondingly weaker global growth
momentum.
USD performance during Trump’s first term
Source: MUFG
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7. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
Looking ahead to this election, a Trump victory would pose an upside skew of risk for USD.
During Trump’s previous term, a ‘Goldilocks scenario’ emerged, marked by aggressive trade
policies and weak global growth. This, combined with a robust performance of the US economy
supported by tax cuts, created an environment conducive to USD outperformance.
Signalling from Trump over his intentions to make the passing of the ‘Trump Reciprocal Trade
Act’ a key economic priority, have only further crystallised market expectations of a similar policy
approach should he be elected. This, which will further negatively impact global growth
momentum, combined with an already challenged global growth outlook particularly in the
Eurozone and China, would once more characterise an environment conducive to USD strength
and spur dollar outperformance.
From a non-USD perspective, a second Trump term and assumed return of similar trade policy,
would impact FX through a few main transmission channels as evidenced during his first term.
These would include via currency policy, fiscal policy and the return of tariff risk, with the latter
being perhaps the most immediate.
Trade policy and associated tariff risk represents the most pressing of the trio, given the ability
of the president’s executive branch to act unilaterally and implement such without congressional
approval; such is not the case for fiscal policy, where congressional legislation would be
necessary. As aforementioned, recent Trump rhetoric confirming his intention to raise existing
tariffs further unless trade partners lower their own tariffs on imports from the US, further
highlights the immediacy of potential tariff risk.
US-China tariff rates toward each other and rest of world (ROW)
Source: Peterson Institute for International Economics
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8. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
As in 2019, FX will be a key channel for pricing in risk premia ahead of the US elections, with
tariff risk likely to be the market’s first point of concern. 2019 saw FX respond to tariff
implementation by the competitiveness channel, with USD/CNY moving up (+10.5% 2018-19) in
tandem with the effective tariff rate. Whilst CNY was the focal point last time, the negative shock
is unlikely to be as significant on this pair this time around given a difference in the wider
backdrop. Primarily, China still has effectively a 20% tariff rate that Biden left in place, alongside
other important nuances such as valuation differences (USD/CNY +15% already since tariff
implementation in 2018). Despite this, CNY impact will still be non-insignificant, just not the
same magnitude as during Trump’s first term.
This time around, TWD is likely to be the focal point for tariff risk pricing, with expectations for
~5% move in USD/TWD by early 2025 should Trump win the election in November. Pricing of
tariff risk via this channel would reflect expectations for Trump to push back on Taiwan’s
dominance over semiconductor manufacturing, a region where he’s been outspoken in
advocating for implementation of US tariffs. Additionally, tariff implementation would pose
downside risks to currencies of major US trading partners such as MXN and EUR as Trump
looks to impose import restrictions.
In terms of upside risk stemming from a Trump victory, FX areas worthy of attention will be
traditional safe haven currencies, notably CHF and JPY, with both performing strongly during
Trump’s first term. CHF, in particular, would benefit from the inflationary shock of tariffs and the
ensuing hit to global growth they would deliver, with investors favouring its safe haven and
low-inflation status amidst macro uncertainty.
The JPY outlook is perhaps less straightforward. The broader implementation of tariffs is
inflationary and they would arrive at a time when the BoJ has already begun to move towards a
more restrictive monetary stance. Typically, further inflationary pressures should spur a more
hawkish BoJ, leading to a re-pricing of JGB yields which offer support for JPY strength. The
narrowing of yield spreads from the BoJ tightening whilst the remainder of G10 central banks
simultaneously ease monetary policy, would favour JPY, particularly against more
growth-challenged G10 FX. Yet all of this is premised on an inflationary outlook that continues to
frustrate the BoJ and puzzle global investors alike, alongside the requirement for the BoJ to hike
into a global easing cycle, something that has never yet happened in history - whilst this time
could indeed be different, there remains a great deal of uncertainty and nowhere near as clear
an outlook as 2018-19.
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9. 2024 US Elections - FX Outlook Harry Purdie - 20/01/24
FX impact - Congressional Outcomes
Whilst the presidential election remains the item at top of mind, congressional races in both the
Senate and the House of Representatives will be of high importance too when determining the
FX reaction function to the US election.
A Trump victory in the presidential race alongside a Republican sweep across both chambers of
Congress would prove to be the most bullish scenario for USD. Given 2017-19 was a period of
Republican control of both the Senate and the House of Representatives alongside robust USD
strength, the market would likely move to support expectations of a repeat of this outcome.
Early indications from Republicans have signalled a willingness to extend the tax breaks that
were characteristic of the first Trump-era, yet this admittedly comes amidst a far more
precarious fiscal position than in 2016. The US budget deficit currently stands at 6% of GDP
(versus closer to 3% in 2016) meaning a reduced ability to loosen fiscal policy substantially;
instead given this elevated deficit, potential tax cuts will likely be counterbalanced by spending
cuts. This scenario appears the most probable given expectations of a Republican win in the
Senate, where the majority of available seats for election are currently Democrat held, alongside
a House of Representatives, of which the Republicans currently already have control.
Alternatively, a Trump win that comes with a divided Congress, would shift the focus towards a
FX reaction function dominated by trade and foreign policy concerns, given the unilateral
influence on such policy by the executive branch, rather than fiscal matters. As mentioned in the
FX Impact - Trump Outcomes section, there would be an expectation of an increasingly
tariff-dominated policy thus also contributing to global growth weakness; such would be an
environment conducive to USD & CHF strength, with TWD, CNY, MXN, EUR as the most
exposed to pertinent downside risks.
Finally in USD terms, a Biden win with a divided Congress would be the least positive outcome.
This would see continued Republican calls for tightened fiscal discipline, resulting in a delay of
fiscal support for the US economy if growth slowed aggressively, driven by depleted Covid
savings and tighter monetary policy, or it fell into a recession. Lack of adequate fiscal discipline
and sufficient addressal over fiscal concerns would likely be viewed by the market as a
longer-term structural downside headwind for USD.
​
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