Election game-changer or not, US debate might be must-see TV for FX
Whether the only scheduled U.S. presidential debate between Republican Donald Trump and Democratic Vice President Kamala Harris changes the course of the 2024 election remains to be seen, but it might still be required viewing for the foreign exchange market.
Speculative accounts were net short the greenback heading into Tuesday's debate, mainly because traders have been preparing for a widely expected interest rate cut by the Fed next week.
But there is potential for those shorts to shift and Treasury yields to gyrate should a clear debate winner emerge.
Bond traders are likely to parse candidates' fiscal plans and potential impact on future Fed policy, which could spill over into FX, while currency markets will also assess levels of protectionism that can be expected.
According to a study published in the Journal of International Money and Finance, currencies with tight trade links to the U.S. can weaken versus the dollar if a protectionist candidate is seen as the winner of a presidential debate.
This might cast a spotlight on the yuan, though with both candidates seen likely to support tariffs and other restrictions on Chinese goods, it could be a matter of the degree of protectionist rhetoric.
If the yuan were to come under pressure, it might also spill over elsewhere. For example, the yen may, by association, come under pressure should the yuan and other currencies in the region slide even if Japan were not a direct target of protectionist rhetoric.
The yen and Japan holdings of Treasuries could come under the microscope if trade barriers or dollar weaponization is directed at a broader swath of countries during the debate.
There is evidence that politics can impact Japanese investor decisions. They dumped French government bonds following snap government elections in July so markets could be sensitive if candidates fail to tread lightly.
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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)
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