The Dollar and Mid-Term Elections 6 November

Posted on November 2nd, 2018 betting odds give the Democrats a 70% chance of winning control of the House, and the Republicans a 35% chance. analysis of the polls gives Democrats an 85% (6 in 7) probability of winning the House.

On the other hand, gives the Democrats only a 13% chance of winning control of the Senate, and the Republicans and 89% chance. give Democrats a 15% (1 in 7) chance of winning the Senate.

33 senators out of 100 will be up for election. 23 of the seats to be contested are presently held by Democrats, and eight by Republicans (three of whom are retiring), with two being independents (part of Democratic caucus).  Republicans currently hold 51 seats, Democrats 47, and independents 2.

All 435 voting seats in the House of Representatives will be up for election.  Currently, Republicans hold 235 seats (54%), Democrats hold 193 (44%), seven seats are vacant.

Over the past 21 midterm elections, the President’s party has lost an average 30 seats in the House, and an average 4 seats in the Senate; moreover, in only two of those has the President’s party gained seats in both houses (Source:

The knee-jerk response to Democrats taking the House, while Republicans retain the Senate, the most likely outcome, may be limited, although it could be somewhat negative for the USD, especially if the Democrat win is emphatic, as it would be seen as a public backlash against the Trump presidency and might embolden Democrats to be obstructionist and pursue impeachment proceedings.

On the other hand, this is the expected result.  A modest win by Democrats might be considered a typical first term reaction.  It would lead to more deadlock and less change in legislation, so largely the status quo, which looks pretty good for the US economy at this stage.  Trump would still be able to pursue his trade policy agenda with China.  Democrats might be reluctant to pursue impeachment proceedings if they scrap over the line as this might play into the hands of Trump who would respond by firing up his conservative base, ultimately avoid any conviction in the Senate, and claim victory.

If Republicans retain control of the House, the kneejerk response is likely to be dollar positive.  It would give the Republicans the capacity to pursue more of its policy agenda.  The chances are that they would pursue even more fiscal stimulus.  Trump has essentially promised a 10% middle income tax cut and infrastructure spending is likely to return to the agenda, finding support from both major parties.

The big sticking point would be – how the government pays for this with its fiscal balance already running off the rails.  This might cause some contention and delay legislation.  However, fiscal conservatism, traditionally a Republican concern, has been squashed under the Trump populist hold over the party.

A widening deficit, more problematic if Republicans control Congress, could at some stage turn into a USD and global asset market problem, but this may be more on a medium-term issue.

If Democrats take Control of the House and Senate, the least likely outcome, the kneejerk reaction is likely to be a weaker USD and volatility in the equity market.  The market would worry that Democrats attempt to wind-back some corporate tax cuts and deliver more cuts to households.  They might look to reform Obamacare.  The market might also worry that they will increase focus on the Mueller investigation and impeach the President.  Although for impeachment to move to a conviction in the Senate, it would require 60 out of 100 Senate votes, still a stretch.

Overall, there is still unlikely to be any fiscal consolidation.  Trump would still focus on his hardline foreign and trade policy.  The conflict between the Administration and Congress may be seen as a major distraction and undermine confidence while increasing the risk of significant policy changes.  Overall this is likely to weaken the USD.