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2020 US presidential election and its potential impact on the currency market

business-articles2020 US presidential election and its potential impact on the currency market
In the face of increasingly partisan politics, the 2020 US presidential election was already set to be one of the most polarising elections in living memory.

But now against the backdrop of a global pandemic, racial tensions and an economic recession, things are set to be even more heated.

However, despite all this, the 2020 election still looks to be defined by one thing, Donald Trump. As one of the most divisive US presidents in history, many voters see November’s election as a referendum on Trump, rather than a contest between the incumbent President and his Democratic rival Joe Biden.

Of course, such a contentious election is sure to stoke uncertainty in financial markets, and is likely to act as a key catalyst of movement in the US dollar in the weeks leading to 3 November.
 

USD goes into the election on the back foot

The US dollar has steadily given ground over the past few months, and now sits well below the levels struck during the height of the coronavirus crisis.

This downtrend in the ‘Greenback’ follows optimism in Europe of a faster-than-expected recovery and a worrying spike in US coronavirus infections over the summer.

The US dollar sell-off gathered pace at the start of September, with the USD/EUR exchange rate striking fresh two-year lows after the Federal Reserve announced changes to its average inflation target.

The Federal Reserve signalled that its ultra-loose monetary policy will remain in place for some time, projecting no interest rate increases until the end of 2023, longer than investors previously thought.

Philip McHugh, Chief Treasury Analyst at Currencies Direct, comments:

‘The recent changes in strategy by the Federal Reserve at the Jackson Hole conference have helped USD to shed ground across the board.

‘The two big changes are that the Fed will no longer tighten simply as a result of the unemployment rate being low, secondly the Fed is aiming for 2% inflation on average so are happy to look through what is deemed as temporary inflation above 2%.

‘The backdrop of Fed policy supports a weaker USD and this has played out recently.’
 

What are current polls saying?

With the dust having settled on the Democrat and Republican conventions, in which Biden and Trump were formally nominated as their party’s presidential candidates, we are getting a clearer idea of how America will be voting on 3 November.

The most recent USA TODAY/Suffolk University Poll suggests that Biden currently leads in the race for the White House, with a 50%-43% split in his favour.

This is a significant narrowing of the 12-percentage-point lead he commanded back in June.

Even so, analysts point to Biden’s current lead in a number of key battleground states as a potential deciding factor in the election.
 

Down but not out

While Trump is currently trailing Biden in the polls, few investors will be willing to prematurely rule out another election win for the incumbent president, given his shock victory over Hillary Clinton in 2016.

Despite the setbacks caused by the coronavirus, Trump still leads against Biden in approval ratings regarding the issue of the economy, something which is traditionally a key concern for many voters.

Trump’s campaign has also reportedly regained some ground as Trump positions himself as the so-called ‘president of law and order’ against a backdrop of civil unrest which has swept across the US over the summer.

Analysts also suggest complacency on the part of Biden supporters could also gift Trump a second term as overconfidence in his poll numbers could see them stay home on polling day.

Meanwhile, Trump’s more passionate base is seen as more likely to turn out and vote for him, with 68% of the President’s supporters reportedly willing to vote in person, in spite of the pandemic.

All of this is before taking the quirks of the US Electoral College into account, which could also hinder Biden’s chances.
 

Potential flashpoints

Given how contentious this year’s US presidential election is gearing up to be, it’s not surprising there are likely to be some flashpoints.

Chief among them being the likelihood of an inconclusive or delayed election result creating considerable uncertainty. This includes the possibility that Trump could refuse to acknowledge the result of the vote.

If Trump were to refuse to vacate the White House, it would set up months of legal wrangling, potentially triggering a constitutional crisis.

However, Biden could also contest the result, with recounts in key battleground states potentially dragging things out for weeks as they did in the 2000 Presidential election.

A disorderly handover and extended uncertainty is likely to infuse significant volatility into the US dollar through the end of 2020 and could see USD test new multi-year lows.
 

What are the experts saying?

Analysts from Nomura Holdings predict that a victory for Biden could help to cool US-China tensions and remove the risk of late-night Twitter tirades that stoke volatility in currency markets, benefitting risk-sensitive currencies.

‘We view a Biden-Harris win as having potential to reduce political and FX volatility as well as lead to less immediate policy aggression against China.’

Gareth Berry, Managing Director at Macquarie, suggests that heightened political uncertainty could drive weakness in the US dollar in the build up to the election.

‘We are quite bearish on the US dollar, not massively so ... but we do see scope for broad-based U.S. dollar weakness into the US presidential elections in November.

‘The U.S. dollar was meant to be a safe-haven currency... But we have had episodes in the past where the dollar has weakened around political events in the US. It’s rare but happens from time to time.’

Philip McHugh, Chief Treasury Analyst at Currencies Direct, suggests that recent polling mishaps could see investors reluctant to make any bets on the US dollar this early.

‘The problem with recent elections and political votes is that generally the polling and the bookies have not actually called it right – think Brexit and the last US election.

‘This will ensure that markets will start to factor in the political uncertainty as we get closer to polling day. 
However, McHugh adds that a particularly contentious election could give way to considerable currency volatility later in the year.

‘Another factor for this election is the polarisation between the electorate and the backdrop of protests and social unrest which when combined with a global pandemic makes it hard to cut a clear picture. This opens the door for higher volatility in the fall in the currency markets.’

 
Unsurprisingly, the election is set to be a major risk event, not just for the US dollar but for many of its peers, and much like trying to predict the result of the election, foreseeing the impact on the currency market is anything but straightforward.

If you are worried about how the US election could impact your transfer plans then get in contact with one of our friendly currency experts by email at customer.s@currenciesdirect.com or via phone at +44 (0) 20 7847 9400.
 
 
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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