Credit Ágricole: FX Weekly - FJElite

The outcome of the US midterms has fuelled fears that overregulation would throttle AI investment and forced investors to reassess their outlook for tech stocks. If confirmed, the long-term consequences of any slowdown of the Al boom could be potentially very negative for the US and the USD. We have also argued previously that the overreliance on foreign buying of tech stocks to fund the vast US current account deficit has made the USD a less attractive safe-haven currency at the margin, during bouts of risk aversion that centre on market AI fears.

Looking beyond the immediate FX market impact of the vote, further USD underperformance could lie ahead according to our historic analysis that suggests that the currency lost on average c.3% in the months following midterms that resulted in Democrat control of the Congress and a GOP President in the last 50 years. In that, the best performing G10 currencies have been the AUD, NZD, CAD and gold while the likes of the EUR and CHF surrendered their early gains in the months following the vote.

Another USD negative relates to the likely legislative impasse in the US Congress after the midterms. US President Donald Trump has already threatened to use his veto powers to block Democrat initiatives. The risk of government shutdowns could grow too. The current government spending authority will lapse on 11 December and this could become the next focal point for the US political and fiscal risks. Our historic analysis of the FX performance around US government shutdowns suggests that gold and the CHF offer the best protection against a USD selloff.

In the very near term, next to their AI angst, FX investors could continue to worry that Trump would re-escalate the conflict in the Middle East now that the midterms are behind us but with geopolitical tensions still unresolved. Even if this risk materialises, however, questions over the USD safe-haven appeal could linger, given its sensitivity to the recent selloff in US technology stocks. Next to US politics and geopolitics, focus next week would be on the US CPI and PPI data for October. Elsewhere, the UK GDP data for September central bank speeches can attract some attention. The NZ election presents some downside risks for the NZD.