The U.S. dollar could care less if political analysts’ forecasts portend to the Democrats winning the House of Representatives or the Republicans maintaining majority in the Senate–it could continue its upward trajectory as traders continue dogpiling into long greenback positions.
After a few weeks of gains as U.S. equities were getting washed through October’s volatility cycle, the U.S. dollar index took a breather on Monday ahead of the November 6 midterm elections. As the dollar retreated momentarily, it gave hedge funds the opportunity to snatch up long dollar positions according per a CNBC report–the latest futures data shows traders adding to their net long U.S. dollar positions, which reached $26.74 billion in the week ending Oct. 30–a level not seen in almost two years.
“Some positions squaring is seen on the dollar before the elections this week though the euro is also soft on the latest news from Europe,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.
Since the start of the year, the U.S. dollar has been on the rise as the stock markets were getting fueled by growth in the famed FANG (Facebook, Amazon, Netflix, Google-Alphabet) stocks and technology in general.
Source: tradingeconomics.com
October’s volatility may have shaken up investors’ confidence, which has them questioning the strength of the dollar as other external factors like trade wars come into play in addition to midterm elections. For the time being though, analysts are quick to scoff at the notion that the election results will materially affect the U.S. dollar negatively.
“Midterms are less likely to mark a major turning point for USD than some investors fear,” Citi analyst Todd Elmer said in a report.
Stocks Could Rise with Dollar
After October’s downpour of volatility, the sun could be shining on U.S. equities following the midterm elections. If history repeats itself, according to Stephen McBride of the RiskHedge Report, it could bode well for stocks.
As McBride noted in a MarketWatch article, stock movements into the green are a perfect 18-for-18 following midterm elections–the type of sure-shot accuracy that could rival even basketball star Stephen Curry from the three-point line.
“Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one,” McBride wrote. “That’s 18 for 18. Even though we’ve had every possible political combination in the past 72 years. Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.”
Related: 3 ETFs to Capture Post-Midterm Election Gain
It’s not just accuracy, but also the extent of the rise as McBride noted that following midterm elections, stocks have gone up by an average of 17% and even higher from their lows–32%. McBride also alluded to the latest October sell-off as standard fare when reacting as a precursor to midterm elections.
“There’s one last important point you should know,” wrote McBride. “Leading up to midterms, U.S. stocks typically perform poorly. From January to October in midterm years, they drop an average of roughly 1%. In all other years, stocks rise roughly 7% in that time frame.”
That being said, a lot of the stocks that got hit in October’s bout of volatility could present value plays, especially if the extended bull market prior to the previous month’s correction continues its run. Just like the way “one man’s trash is another man’s treasure,” one analyst’s overvaluation could be another analyst’s value proposition.
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