By Michael O’Neill

November 6 is election day in America. It is a mid-term vote, and they are not usually a factor for FX or other markets. This one is. The media is rife with talk of a “Blue Wave.”

President Trump’s Republican Party controls the Senate with 51 seats.  The Democrats have 49 seats including 2 independents.Dreams that the Democrats will get control of the Senate may be just that-dreams. There are only 34 of 100 Senate seats being contested, and they have 26 of them at risk.  They could finish these mid-terms worse off than before.

It’s a different story for the House of Representatives. All 435 seats are up for grabs.  The Democrats need to gain 24 seats to get a majority. They think that is going to happen.  As do the polls.  The latest ABC News poll puts the odds of the Democrats winning the House at 85.3%.  CNN is predicting a 17 seat Democrat House majority.  This is the Blue Wave.  A tsunami of dissatisfaction with President Trump’s policies and personality will shift voters to Democrats.

If it happens, FX and other financial markets will call it a relief. A Democrat House majority would temper the impact of Trump tweets as Democrats could thwart any new legislation.  President Trump’s tweets, hostile rhetoric, and threats have embroiled markets since he took the oath of office.  There are many examples of a Trump tweet triggering market volatility.  He has threatened Russia, China, North Korea, Iran and Turkey.  He skewered Prime Minister Trudeau in interviews and tweets.  He debased many Administration and Washington officials and mocked the FBI and the Justice Department.  Mexico has been a favourite whipping boy.  Trump is deploying over 5,300 troops to the southern border in a move to thwart a mass illegal immigration threat.  Cynic’s see it as a blatant ploy to appeal to those voters who feel Democrats are too soft on immigration. 

However, there isn’t any guarantee that if the Democrats win the House, the US political circus won’t continue to disrupt global markets.  A lot of Democrats would like to impeach Donald Trump, and a House Majority gives them a lot of ammunition.  Former Vice President Joe Biden isn’t one of them.  He prefers a unifying approach.  Democrat House Leader Nancy Pelosi seems to agree with Mr Biden.  She said she would attempt to cooperate with the President.  It is hard to see Trump working closely with Ms Pelosi.

Wall Street may not be enamoured with a Democrat House victory.  President Trump’s tax cuts have helped fuel stock market gains.  Democrat chatter about cutting them back to help reduce the deficit could spark a wave of selling. 

A Democrat House majority raises questions about the new United States Mexico Canada Agreement (USMCA) on trade.  The biggest question being, will the Democrats ratify it?  The Democrats could use approval as leverage to get the President and Republicans to work to improve the Affordable Care Act rather than replace it, for example.  If the Democrats choose to block the USMCA, it will reopen the can of worms of Nafta renegotiations and tariffs, to the detriment of the Canadian dollar.

The US mid-term elections should not have an immediate impact on the Canadian dollar, leaving traders to keep their focus on economic developments to drive direction.   That direction got a tad murkier following the release of the August GDP report.  The Canadian economy grew 0.1% during that month, a tad better than what was forecast but lower than July’s 0.2% gain. The details in the report were a little concerning because the growth was concentrated in energy and financial services while growth declined in 12 of 20 components.  It wasn’t horrendous.  Bank of Montreal economists suggested that the result meant the economy was still on track for 2.0% GDP growth in 2018, which is above the Bank of Canada’s forecast of 1.8%.  By itself, the GDP report will not deter the BoC from its rate hiking path, but it may reduce the urgency to bring rates to the “neutral” level.

Oil prices may have a bigger impact on the Canadian dollar in the immediate future than BoC rate expectations.  The August rebound in prices for West Texas Intermediate (WTI) oil which lifted them from $64.50/barrel to $76.77/b at the beginning of October, has been completely reversed, and then some.  WTI traded at $63.14 on November 1.  Traders are concerned about rising risks for a global economic slowdown following weaker than expected China Manufacturing Purchasing Managers Index data which was 50.1.  A level below 50 indicates a shrinking economy.  In addition, US crude inventories continue to rise.  Fears of a crude shortage because of the US sanctions on Iran have eased, since Russia and Saudi Arabia promised to increase production. Exacerbating the oil price situation is the very steep, 56.58 Canadian dollar discount for Canadian oil.  The lower prices are acting as a drag to Canadian dollar gains.

The mid-term elections will be the focus next week, but as long as Trump is President, the circus is still in town.