Chaos of Election Puts a Premium on JPY & DXY

Joe Biden has not yet clarified the scandal of his son, Hunter Biden, since it was revealed, which penalizes his approval rating and even push it skewed to the downside. I previously said that Biden was certain to win while Trump would be a busted flush. However, the result of the election turns to be ambiguous as the situation now is quite different. Besides the twists to the general election, the following issues are worth keeping an eye on.

First of all, it is notable in the presidential debate whether Biden is able to dissociate himself from the scandal or remains dumb ahead of Trump‘s questions. Polls after the debate also deserve attention, so as to see whether Biden’s campaign will fall into crisis. Second, Trump is likely to take extreme measures to troll for votes in the following week, which may send wild swings to financial markets. Third, the Democrats may have also grasped scandals that Trump has pegged and bring them to light in the next week. Fourth, a judicial review after the election, no matter the result, is possible because either of them may refuse to admit to the defeat, which will intensify the turmoil.

Fifth, there is such a possible situation after the election that one Party hosts the White House while the other one takes charge of Congress. Reviewing the past five elections, the Democrats only ran the Senate rather than Congress in 2012 when Obama was re-elected, which is similar to the situation in 2000 when George W. Bush came in power with only the House under Republican control. Specifically, the Dow Jones index declined across the board in November 2012 and 2000. Investors in the face of such a situation may expect future difficulties that will hinder the Presidents practice, a negative outlook that may dampen the stock market. Sixth, the result of the election may be the occasion of mass riots for supporters of both camps, heightening the tension.

Online news in October 2016 showed that the Democratic candidate Hillary had led seven percentage points over Trump. The media at the time had a lopsided view that Trumps days were numbered. The result, however, surprised all. With the latest polls indicating that Biden leads seven percentage points over Trump under the influence of the scandal, the situation now is exactly the same as that in October four years ago. Since Hillary was defeated because of her Email Scandal, Biden is possible to see a repeat of the past, in other words, Trump may secure a second term. All in all, the chaos of the U.S. election may trigger increasing anxiety and risk aversion regardless of the result, weighing on U.S. stocks and in turn put a premium on the Japanese yen and the DXY.

Considering the U.S. stocks have been affecting the greenback and pushed it to the backward trend, chaos and concerns related to the election are expected to create space for a rebound in the DXY. But some analysts pointed out that once Trump is defeated, the Federal Reserve can return to 100% power without any intervention as it no longer needs to accommodate Trump. To this end, the Federal Reserve is possible to raise interest rates in advance, which will boost the DXY. In addition, the haven-linked Japanese yen is expected to be sought-after among traders seeking risk aversion in financial markets. With that said, I am bullish on future yen and expect a chance for USD/JPY to breach the 104 level and head to the 100 level in the short term. Notably, gold purchase for escaping from the risks in the stock market is not advised because gold prices may see a sharp drop once the DXY gains strength.