The months leading up to an election often bring volatility to foreign exchange (FX) markets, but it doesn’t stop after the ballots are cast. Did you know that market volatility has a tendency to extend past election day, all the way to inauguration day.
This transitional period has been coined as a ‘Lame Duck Session.’
This phase can often bring heightened uncertainty as legislative decisions made during this time can influence currency values and market stability. In this blog, we will explore the relationship between lame duck sessions and FX volatility, examining historical impacts and providing risk management tools to help you or your business navigate these transitional periods effectively.
Lame Duck Session: This is a term used in the United States that refers to the session of Congress after the November election and before the new president-elect is inaugurated. This period can often bring volatility to markets due to a general air of uncertainty.
Why lame duck sessions matter
Lame duck sessions typically occur between November and January, immediately following the general elections in November, once the results are announced and a winner is declared. During this time, the outgoing members of Congress, who may not have been re-elected or are retiring, continue to hold their positions and have the authority to pass legislation.
Lame duck sessions can be highly significant to financial markets including the FX market because they often involve the passage of important legislation, budget approvals, and other critical decisions that can have lasting impacts. For example, the Federal Privacy Act passed during the 1974 lame duck session and the United States-Mexico-Canada Trade Agreement finalized during the 2020 lame duck session.
Understanding the post-election season is crucial for those involved in financial markets, as the decisions made during this period can lead to increased uncertainty and volatility, particularly in the foreign exchange markets.
OFXperts can help to closely monitor these sessions to anticipate potential market movements and adjust their strategies accordingly.
Volatility: Exchange rate volatility refers to the tendency for foreign currency to appreciate or depreciate in value and ultimately affects the profitability of a currency transfer overseas.
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Historical impact of lame duck sessions on FX markets
Lame duck sessions have historically been periods of significant legislative activity and market volatility. These sessions, occurring after an election but before the new officials take office, can often see outgoing lawmakers pushing through last-minute legislation, or budgets which can have profound effects on financial markets.
One notable example is the lame duck session of 1932-1933, during which the US faced the Great Depression. The outgoing Congress and President Herbert Hoover struggled to address the economic crisis, leading to significant market instability. The uncertainty and lack of decisive action during this period exacerbated the financial turmoil.
Another significant event occurred during the lame duck session of 2000, following the contentious presidential election between George W. Bush and Al Gore. The uncertainty surrounding the election results led to increased market volatility, as investors were unsure about the future political landscape and its impact on economic policies. During this session the US Dollar Index (DXY) rose by around 7.46% between November and February.
In more recent history, the 2018 lame duck session saw a prolonged government shutdown due to disagreements over budget allocations, particularly funding for a border wall proposed by President Donald Trump. This shutdown, the longest in US history, created uncertainty in the markets creating FX volatility.
These examples help illustrate how lame duck sessions can lead to significant market reactions, driven by uncertainty. But just because markets may fluctuate during this transitional period doesn’t mean your international transfers need to take a hit too. Let’s explore OFX’s risk management tools to help you make the most of market movements during a lame duck session.
Using OFX’s hedging tools to save
See how one Canadian-based produce buyer found hedging success with OFX’s Forward Contracts.
Risk management tools to combat market swings
Unexpected market movements during times of uncertainty can feel overwhelming, luckily our OFXperts always have your back. With a variety of risk management tools for your business or personal transfers, you can protect your money against forex swings.
Forward Contracts* are a useful hedging tool that allows you or your business to lock-in your exchange rate for up to 12 months. This means you will still be able to budget and plan ahead no matter what the uncertainty of post-election sessions bring.
Limit Orders** let you or your business target your ideal exchange rate. If it’s reached, OFX will help you get your money moving. Our OFXperts monitor the markets day and night to help you secure your target rate, even while you’re sleeping.
Currency Outlook is a monthly newsletter with OFXpert insights that helps keep you in the FX loop. Compiled by our treasury experts, this report inspects key currency shifts, global news, and political landscapes to forecast forex fluctuations.
24/7 OFXpert support so you are never alone in your forex transfers. Our OFXperts sit in offices around the globe ensuring you have access to real, human support regardless of when the market moves.
As the 2024 lame duck session begins, we want you to be prepared with the knowledge and FX tools to combat whatever volatility may be lurking around the corner. Whether you have international business payments or personal foreign exchange transfers in the works, OFX’s risk management tools can help secure your transfers during this post-election season. Feel free to reach out to an OFXpert to discuss what tools might be right for you.
*If you book a Forward Contract, it may mean losing out if the market rate improves because you’re contracted to settle at the agreed rate. Read more.
**If you book a Limit Order, it may mean losing out if the market rate continues to move above your target rate. There is no guarantee that your desired rate will be reached. Once the order is triggered, the transfer is binding and cannot be canceled.
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IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.
