The US presidential election in November will have minimal impact on Asian economies as the US is no longer the dominant economic partner of countries in the region, according to the US 2016 elections — Fear and Frustration

report published by Standard Chartered on Aug 23.

The US economy is only the third largest contributor to world growth, behind China and Asia ex-Japan. Despite this, the report says, the interplay between politics and US-Sino relations cannot be ignored and will likely continue to impact China’s currency policy.

China and the US are each other’s most important trading partner. The former also holds a significant portion of US treasuries as part of its current account recycling over the past decade.

In order to keep US rates well anchored, the Federal Reserve is expected to keep things on hold in the coming months, especially if election-related uncertainties pick up, says the report. It adds that the recent improvement in US economic data is offset by market expectations of an extremely gradual pace of Fed rate hikes and an expanding universe of ultra-low and negative-yielding developed-market debt.

This backdrop should support Asian local currency bonds, particularly from countries that still offer attractive real yields and are perceived as fundamentally stronger. However, if risk appetite suffers in the lead-up to the US elections, disorderly US dollar strength could be possible, says the report. This, in turn, may cause weakness to the renminbi and broader emerging market foreign exchange.

Meanwhile, China’s importance as a final export market for Asia has grown more than any other country, the report says. When measured by direct trade data, China’s dominance is greater particularly for Hong Kong, Singapore, South Korea and Taiwan. Hong Kong’s direct exports to China, for instance, accounted for 88% of its nominal gross domestic product in 2014 compared with about 11% of its 2011 GDP. For Singapore, the difference was 17% in 2014 versus 6% in 2011.

Risk assets will benefit if Hillary Clinton wins the US presidential election in November, the report says. “Historically, US Treasury yields (USTs) have risen the most when the same party controls the White House and both houses of Congress. This seems unlikely, and we remain constructive on USTs over the next 6 to 12 months.

“A Donald Trump presidency would add many layers of uncertainty compared with the continuity Clinton offers. We think a Trump presidency would more likely prove UST-negative, primarily via the term-premium channel.”

The report says emerging market local currency bond markets could benefit from a Clinton win. If this happens, it would likely prolong the global hunt for yield and tighten risk premia.

“The impact of a Trump win on risk assets, particularly on EM rates, is unclear. Within emerging markets, we expect low-beta Asian low currency bonds, especially the low-yielding ones, to outperform their EM peers given Asia’s large local ownership of bonds, relatively healthy external accounts and low inflation.

“In the FX market, a Clinton win would be more benign as she is the status quo candidate. The US dollar would probably gain in the short term on a Trump victory due to the US dollar’s safe-haven status. Trump’s foreign profit repatriation proposals could trigger further US dollar appreciation.”

A Trump presidency would likely heighten tensions with China, the report adds. “He has labelled China a currency manipulator, and China could retaliate by slowing FX reform and capital account opening, exacerbating volatility in the renminbi. This increased volatility could spill over to the Korean won.”

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