Watching the markets for potential currency impacts as the 2024 US presidential election approaches? Our OFXperts have helped pull together some historical examples of how past US presidential elections have affected the foreign exchange market, and useful tools to help manage your FX risks during this period.
Volatility: Exchange rate volatility refers to the tendency for foreign currency to appreciate or depreciate in value and ultimately affects the profitability of a transfer overseas.
Market volatility and political uncertainty
Election cycles can bring uncertainty and volatility to financial markets. As US voters head to the polls this November, many of you may be grappling with questions about how this US election could affect your foreign currency transfers.
They say history doesn’t repeat itself, but when it comes to US elections, historical data shows that you can expect market volatility. Let’s explore some historical examples of how presidential elections have affected the currency exchange market.
The time leading up to an election can cause volatility in forex markets as investors are unsure which direction the USD will move following the vote.
- Volatility leading up to US elections
- The lead-up to the 2016 election caused a spike in the US dollar’s value due to expectations of fiscal stimulus under President Donald Trump. The US Dollar Index (DXY) rose 7% in just 3 months leading up to the election. The DXY increased from 95.463 in August 2016 to 102.210 in November 2016.
- This election also had a global effect on currencies with the GBP/USD currency pair dipping from the 1.460 level to the low 1.224 range in October 2016 while the USD/CAD pair rose from 1.255 in March 2016 to 1.343 in November 2016.
US Dollar Index (DXY): The US Dollar Index or DXY is a market index benchmark that measures the value of the US dollar relative to other widely-traded international currencies.
Heightened volatility during elections
A closely contested election, with a narrow margin of victory, has tended to amplify market volatility. When the race is tight, like in the US 2000 presidential election, every ballot counts and the potential for unexpected outcomes increases.
- Narrow margins and heightened volatility
- In the 2000 presidential election between George W. Bush and Al Gore the margins were tight and volatility prevailed. As one of the closest elections in American history, the DXY oscillated from 106.8 in May 2000 up to 116.62 during the close race in October 2000.
- The global implications of the close 2000 US presidential race showed in the AUD/USD pairing. The AUD/USD currency pair fell a staggering 14% from 0.605 in June 2000 to 0.519 in November 2000.
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Post-election policy changes and forex market volatility
Even after the ballots are counted, markets have historically remained on edge. The winner’s policy announcements in the weeks following an election can also trigger market reactions.
Case in point was Ronald Reagan’s policy changes following the 1980 US presidential election. For instance, changes in tax policies, infrastructure spending plans, or international trade agreements can directly affect specific sectors and asset classes.
- Post-Election Policy Changes
- In the 1980 presidential election, incumbent President Jimmy Carter, a Democrat, faced off against Republican challenger Ronald Reagan. Reagan won the election, and his policy changes had a significant impact on the economy and financial markets. Reagan’s tax cuts, tight monetary policies to combat inflation, and advocacy for free trade and deregulation strengthened the US dollar after this election and for most of the early 1980’s. Causing the DXY to rise to an unheard-of high of 160.410 during Reagan’s second term in 1985.
With so much uncertainty on the horizon, the only thing investors are certain of is the chance for volatility in the currency exchange market. To help combat forex volatility it can be helpful to have a reliable foreign exchange provider like OFX and the right risk management tools including Forward Contracts*.
Using Forward Contracts to save more
See how Canadian-based business Wine Alliance found success in the volatile grape industry with OFX Forward Contracts.
Combatting election volatility with OFX
Staying ahead of market movements can be difficult, especially in an election year. When you work with the right forex partner it can be easier to prepare yourself or your business for market volatility.
So how does OFX help you navigate currency volatility? Our OFXperts equip you with the information and the tools needed to manage market volatility, especially around elections.
At OFX, we start with a risk management strategy to help navigate market uncertainty. This could include diversification strategies, appropriate hedging tools, and staying informed on policy changes, such as taxation or monetary policies.
Understanding historical market reaction patterns during election cycles, like the tendency for the USD to rise or fall depending on the party elected, can help you better mitigate risks. For example, according to a paper by Pasquale Della Corte from Imperial College London and Hsuan Fu of Laval University published in 2020, “On average, the US dollar appreciates by 4.31% per annum during Democratic presidential terms and depreciates by 1.25% when the US president is a Republican.”1
Currency tools and forex risk management during elections
Knowing the historical patterns of the USD during election periods, like the relation to the winning presidential party, could help you manage your future forex risk.
Plus, when you work with OFX, you have the hedging tools necessary to help protect you or your business against market moves.
This includes Forward Contracts*, Limit Orders, Daily Commentary and more. Let’s dive into each of these tools:
Forward Contracts* are a hedging tool that can help you or your business budget and plan ahead by locking-in your currency exchange rate for up to 12 months. This means you can fix all or even a portion of your known FX costs for the year ahead.
Limit Orders allow you to target an exchange rate that suits you or your business and, if it’s reached, OFX will help you get your money moving.
Daily Commentary saves you time and money by letting our OFXperts monitor the market for you. OFX’s forex market updates supply you with regular insights into market movements.
As markets fluctuate and the election draws nearer, don’t forget that you can help protect your foreign exchange ventures with OFX’s Forward Contracts and other hedging tools.
*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.
Navigate any currency swings during the US election with OFX
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Sources:
1. https://www.aeaweb.org/conference/2021/preliminary/paper/RHfSAy7e page1-2
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. OzForex Limited (trading as OFX) and its affiliated entities 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.
