As November 5, 2024 fast approaches, it appears clear that the United States presidential election is set to be as tumultuous as ever between Republican nominee Donald Trump and Democratic candidate Joe Biden. The fallout of a volatile campaign trail could pose significant risks and opportunities throughout the forex landscape.
With the race to the White House proving to be particularly divisive in recent years, we can expect the battle between Biden and Trump to extend far beyond political ideology and both domestic and foreign policy.
The social and cultural impact of the 2024 election could make the events of the coming months more challenging than ever before for currency traders, and the world of forex could face unprecedented uncertainty.
Back in May, Bloomberg reported that currency markets had already begun pricing in volatility associated with the US elections, and concerns over a prospective Trump presidency have pushed wider uncertainty surrounding the Chinese offshore yuan, with spreads between six- and three-month implied volatility rallying to their biggest increase since records began in 2011.
For institutional FX traders that have grown accustomed to high-frequency trading (HFT) with sophisticated algo execution models, there may be a question of whether their adopted technology has been built to withstand such a significant level of volatility in the markets and whether more twists and turns in the election race could hinder performance.
How Could the Presidential Election Affect the Dollar?
Generally speaking, election volatility is a difficult time for investors. This will see more uncertainty seep into the dollar throughout 2024 and into 2025, particularly should the election remain a close-run contest.
However, for forex traders, it can be tempting to use this volatility as an opportunity to maximize their yield by reacting faster to fundamental analysis and emerging news.
Both candidates bring different ramifications for the FX landscape, and depending on performance, we could see algo execution models work harder than ever in discovering and acting upon rapidly changing circumstances.
While we can expect a resumption of current fiscal policies in the event of a Biden win, recent circumstances have indicated that a Democrat victory may in fact mean Kamala Harris enters the White House, which increases the prospect of market volatility.
The prospect of a Republican win could see Trump’s proposal of a 60% tariff on Chinese imports throw dollar trading pairs with the Chinese yuan and the euro up in the air. Additionally, the prospect of Trump’s more aggressive stance on foreign policy could see demand for the dollar grow as a safe haven should geopolitical tensions boil over.
Variations in fiscal spending policies could also bring uncertainty throughout forex markets, with Trump’s more favorable approach to tax cuts for corporations flying in the face of Biden’s advocacy of higher rates.
According to ING insights, a Trump victory would be negative for global trade and create challenges for currencies like the renminbi and the euro. This stems from the Republican candidate’s trade war during his previous presidency, which saw EUR/USD fall more than 10%.
However, ING notes that Trump’s protectionism was driven by fiscal stimulus stemming from the TCJA tax cut, which was passed earlier in his presidency.
But how will these significantly varied fiscal stances play out for algo execution models that are yet to be tested in the volatile climates of a close-run presidential election? Could institutions be at risk of losing out in such an unpredictable landscape?
Big Data Reliance as Fundamental Analysis Skyrockets
The dangers of algo execution models for institutional forex traders are that the technology will be unable to adapt quickly enough to changing sentiment, breaking news, and the prospect of misinformation as presidential candidates ramp up their campaigns.
To mitigate the risks and capitalize on the opportunities of the US presidential election, institutions must review the artificial intelligence supporting their algo execution models to seek assurances in the technology’s analysis of fundamentals, market data, prospective scenarios, and trading strategy cohesion.
Models must be capable of interpreting data from all news sources while appropriately weighting reputable sources to avoid acting on misinformation. This can help to bolster both accuracy and efficiency within wider institutional strategies.
Incorporating Natural Language Processing
For the 2024 presidential election, fundamental analysis will be taken to new levels through natural language processing (NLP) and AI systems. In contextualizing and interpreting human language within financial news, social media, and multichannel reporting, NLP systems can develop a comprehensive understanding of market sentiment and make more decisive algo execution decisions as a result.
This empowers AI platforms to make proactive decisions and anticipate market movements based on their understanding of public perceptions regarding breaking news events. This can be an invaluable tool ahead of November 5th.
Balancing Risk and Volatility
The US presidential election carries a significant global impact. This means that the campaign trail can be especially lucrative for the many institutions that have embraced internationally-focused prime services for brokers that offer exposure to global markets.
Given Biden and Trump’s inconsistencies in their perceptions of Russia and China, the presidential race will play out throughout international markets.
Again, for algo execution models, keeping up with such frenetic international fundamental analysis will be a challenge.
This will require algo execution models to be backed up by risk management techniques to prevent losses when volatility spills over across international markets. Features like stop-loss orders, position-sizing rules, and on-the-fly parameter adjustments in trading strategies will all be major assets in institutional risk management in forex throughout the year.
Finding Opportunities in Uncertainty
The paradox of institutional forex trading is that market uncertainty offers the biggest opportunities for higher yields.
For institutions, many existing algo execution frameworks will be untested during US presidential election years, and the influx of fundamental analysis could put models to the test over the coming months.
However, with the right blend of adaptability and efficiency, AI-powered FX trading tools can help to rapidly interpret changing sentiment and make proactive execution decisions that can aid institutions in reaping the rewards of wider uncertainty.
In a landscape that’s likely to become more volatile over the months ahead, discovering the right mix of risk management and reacting to emerging opportunities could make forex increasingly lucrative for the most resourceful institutions.
