Democrats on Brink of a Sweep as Buck Teeters at 1.2800

Published November 8th, 2006 - 03:10 GMT

UK Consumer confidence at 9 month high
EZ exports surge to highest in four years.
JPY BOJ board  member Mizuno backtracks on Fukui remarks
US Dems on the brink of taking Congress
US calendar nearly empty for second day in row

Having won a comfortable majority in the House (227-193), the Democrats stood within a few thousand votes of capturing the Senate as well in the midterm 2006 elections.  With the count in the Senate currently at 49-49 Democrats led the two outstanding contests in Virginia and Montana by 8,000 and 3,600 votes respectively. Although the lessons from Florida 2000, Italy 2006 and Mexico 2006 have taught speculators that the leader on election night generally wins the ultimate prize, an element of doubt remained regarding Democrats ability to complete a clean sweep. The situation is further complicated by the fact that Joe Lieberman won in Connecticut as an independent. A former democrat who lost his partys primary Mr. Lieberman recaptured his long held seat under the Lieberman for Connecticut party banner.  Although Senator Leiberman vowed to caucus with the Democrats, there is absolutely no reason to believe that a man who turned his back on his own party wouldnt jump at the chance to play kingmaker and decide to shift his allegiance to Republicans in case the Senate becomes split 50-50. 

The reaction in the markets therefore was relatively muted as the true resolution of the US election may not be known until after the Thanksgiving holiday when all of the votes will be ratified. The difference between a mere win of the House of Representatives and a complete capture of both chambers can be significant  for the Democrats as one would allow them to merely block some of the excess of  President Bush legislative agenda, while the other would actually allow Democrats to overturn parts of Bushs policy.  Conventional wisdom states that a full sweep by the Democrats would be bearish for the dollar as political upheaval is always viewed negatively by the FX markets. However, the longer term view may not be nearly as dour especially if the Democrats are able to force a change of policy in Iraq, reducing the massive (more that $1 Trillion dollars) outlays on the conflict that threaten to create enormous structural pressures on US fiscal finances in 2007.  Indeed a divided government with far less profligate attitude towards spending may be ultimately seen as net positive by foreign investors who continue to finance US record trade deficits and are the primary prop underneath the dollar. For the near term however the picture is clear as mud and circumspect trading is likely to be the order of the day until the political outcome becomes more certain.


 

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