Phase of stronger equities linked to the midterms could hurt the USD – Credit Suisse

US politics becomes a live issue again due to yesterday’s midterm elections. Republicans are on track to achieve a majority in the House of Representatives while Democrats could lose the Senate too. In that case, equities could rise, hurting the US Dollar, economists at Credit Suisse report.

US Midterm Elections: lots of headlines and a possible weak USD impact

“While final results may not be known for some days, the odds are high that Democrats lose control of the House and possibly the Senate too. This would bring about yet another phase of ‘divided government’. Market analysts covering the equity market tend to lean towards stronger equities as a likely outcome of such a result.”

“Because higher stocks also tend to go hand in hand with a weaker USD, it’s logical to expect that a phase of stronger equities linked to the midterms could hurt the USD, which is why we advocate tight stops on USD longs near term.”

“Another factor to consider is the possibility of yet another showdown over the US debt limit. If this comes into play, we suspect that it would not be until the middle of 2023 before a critical phase is reached where a real risk premium is priced into US debt and assets. This period should notionally be bad for the USD, especially if the rest of the world is in a recovery phase from recession at that point in time. But if the market is in the throes of ‘risk off’ forces at that point, there could be non-linear outcomes as we can imagine the focus then shifting to USD shortages and global risk aversion, thereby boosting the greenback. But this debt limit element has many months to play out yet and is not an immediate issue.”