How the dollar could predict the US victor

Forget the exit polls and track how the greenback reacts tomorrow

TUSCAWARAS. Volusia. Arapahoe. Investors looking for early signs of the outcome of the US presidential election tomorrow will want to scrutinise results from these three swing counties in Ohio, Florida, and Colorado respectively.

Or they could just watch the dollar. The dollar, rather than equities or the US government bond yield, may offer the best proxy for the outcome of one of the closest presidential races in history – with its major ramifications for global investors. Growth prospects, Fed action, tax rates, defence spending, cash repatriation; all these hinge on whether Mitt Romney or Barack Obama emerges victorious.

And the dollar may offer the cleanest real-time read as to which candidate has the edge. US equities could benefit regardless of the outcome, so long as it is quickly determined. Based on precedent from other tight races, JP Morgan strategist Thomas Lee says the S&P 500 is likely to add 3.3 per cent if President Obama is re-elected, and 6 per cent if Romney takes the White House instead.

As for Treasuries? It’s not as straightforward as some suggest – rallying on a win by fiscal tough-talker Romney or selling off on victory for big-spending Obama. The opposite may be true; that US government bonds sell off on a Romney victory, as he would likely preside over a more hawkish Fed. That, as Citigroup strategist Steven Englander points out, is precisely what happened the moment Romney’s surge began after the first presidential debate on 3 October until his odds peaked on 25 October. The benchmark ten-year U.S. Treasury yield rose during that period from 1.62 per cent to 1.83 per cent.

The ten-year yield is worth watching tonight, as exit polls start rolling in. A small jump would likely indicate that Romney is pulling ahead, given that the market currently appears to be discounting an Obama win. This is reflected in the political odds as well, which on Monday implied a 67 per cent chance that the President would be re-elected. Still, movements up or down of just a couple of basis points on the ten-year may be too vague to be useful.

More telling could be the reaction of the US dollar. Romney strength has typically moved in tandem with dollar strength. This was also observed from the 3 Oct to 25 Oct period. Of course, the dollar has to be watched against a range of other currencies to make sure it, and not, say, the euro, is the protagonist. And it is worth cross-checking moves against other assets sensitive to the election outcome; small-cap stocks, for example, which Lee says would benefit under a Romney win from a friendlier tax code, and more mergers and acquisition activity. Gold too has moved inverse to Romney’s election odds.

As for the all-important “fiscal cliff” which looms just after election day? Defence contractors like ManTech International have jumped, even as Obama’s odds recovered; a vote of confidence, perhaps, that regardless of the outcome of this vote, the US won’t be going over the edge.

Kelly Evans is a CNBC anchor. You can follow her on Twitter @Kelly_Evans