Political Differential Moves Markets Too

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Quotable – A dash for trash may yet become a flight to quality (Excerpts our emphasis)

“Fix the problem, not the blame.”

                             Japanese Proverb

FX Trading – Political Differential Moves Markets Too

In our analysis of currencies we’re constantly reevaluating the growth and interest rate differentials between countries. The reason is simple: better growth and higher interest rates make investing in one currency, relative to another, more appealing.

But what about political differential? Is that really something that could influence the way currencies behave?

First of all, it’s not easy to perfectly compare the government of one country to that of another country. But it is not that hard to notice the difference between administrations within a single country and how changes may influence economic matters.

Typically, politics matter more in emerging countries where financial systems and governments are less developed and the economy can be more easily influenced by the party in power. We saw South Africa recently elect a new President. And since Mr. Zuma took office, the South African rand has beelined higher versus the US dollar on the early thinking that he can fix many problems and bring solid growth trends to South Africa.

Japan just elected a new administration and so far the Japanese yen has been supported by the outcome. It’s still early but it shows that people are paying attention to the political environment there.

What about the US though? From the outside looking in the US has been a model of political stability and efficiency, relative to so many other governments and regimes. I mean, the US has remained a superpower for very many years now and possess unmatched positions — economy, military, fiscal flexibility, etc. — relative to major economies across the globe.

But being ‘Number 1′ means being on everyone’s radar screen, watched to see how the leader might screw up. That’s why, for instance, the US deficits are such a boondoggle for the US dollar (not to mention the dynamic of reserve status). Especially in this recessionary period, the US isn’t the only one running into deficit trouble. But in looking for reasons why the top dog is softening up, it is the deficit in the US that makes the headlines and is gobbled up.

And yes, the current administration and the rest of the US government can play a big role on deficit expectations. The one currently in office and the representatives currently in control could really make a big difference, adding to current financial muck and undermining the fiscal position with more and greater spending. And as long as these deficits represent the key long-term fundamentals for investors meddling in the US dollar, then government could really become a big downer for the buck.

Yves Lamoureux, from Blackmont Capital, shared with us recently his view on how approval ratings for the current administration might eventually feed into US stocks. In doing so he compares the approval ratings of past US Presidents with corresponding market data to show a correlation between public opinion and price action.

To view the full piece, click on the following link (to Planet Yelnick). I think you’ll enjoy his comments and accompanying charts.

Presidential Approval Ratings and Stocks: Are They Linked?

With those comments in mind, how might the President’s approval ratings impact the US dollar? I suppose there are two obvious scenarios for the buck if things play out the way Yves has presented them; the first scenario seeming a bit more likely to us than the second.

  1. US stocks sink sharply following a severe drop-off in Obama’s approval ratings. The risk appetite dynamic remains in place and the US dollar becomes buoyed by the move out of riskier assets.
  2. US stocks sink sharply following a severe drop-off in Obama’s approval ratings. The risk appetite dynamic becomes irrelevant and there is a run out of both US stocks and the US dollar.

Either way, Obama’s approval ratings are falling unlike almost any other President before him. It seems his inititiatives aren’t settling well with a fan base that’s mired in recession. He seems to have a tough road ahead of him if he wants to win back support of the people. That may happen naturally if the economy begins to improve, but as most analysts have not been saying in their recovery forecasts — whatever growth we can squeeze out of the economy in the next 8-10 quarters is not going to resemble the pre-recession growth we became so comfortable with.

It will be interesting to see how much this President impacts the overall feeling towards the US economy.

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