What to expect in FX on US presidential election day

Americans head to the polls today in what has been billed by some as one of the most important in recent history as the world grapples with the worst public health crisis in a century.

Democratic candidate Joe Biden continues to hold a comfortable lead in the national polls (7 points), although this lead has narrowed slightly in the past few days. Online political prediction website fivethirtyeight continues to give Biden the clear edge (89% chance of winning), with a similar measure from PredictIt suggesting a closer race (64%). Biden also remains clear in six of the seven most important swing states, albeit Trump has closed the gap in many of them (Figure 1) and markets remain wary of another surprise result, as we saw in 2016.

Figure 1: Biden Lead in Key Swing States (April 20 - Oct 20)

Source: Refinitiv Datastream Date: 03/11/2020

Voting will open as early as 6AM eastern time in some states, and will close between 7-9PM ET depending on the state. The first exit polls should be known soon after, when we expect the first significant bout of volatility to take place. Providing the large increase in mail-in ballots doesn’t delay the results, we may have a good idea as to who is set for the White House in early-morning UK time on Wednesday. The narrowing in the swing state polls and sharp jump in mail-in votes (around 100 million already cast) does, however, mean that both a delayed or contested result remain possibilities. Either outcome could drag the process days or weeks into the future, as was the case when Bush won in 2000. Under such scenarios we would expect investors to flock to the safe-havens, including the dollar, and sell just about everything else.

As we mentioned in our US election preview report, we maintain our view that a Democrat blue wave remains the most likely scenario. We would likely see a sharp relief rally, with emerging market currencies appreciating and the safe-havens selling off. Another surprise Trump win would trigger even sharper moves, in our view, with investors piling into the safe-haven dollar at the expense of most other currencies.

More Bank of England stimulus likely on the way

Ahead of today’s election, the US dollar has been on the back foot, falling rather sharply against both the euro and sterling so far this morning. The pound is back hovering around the 1.30 mark versus the dollar, with levels of overnight volatility in sterling now at its highest level since March. An added risk factor for the UK currency this week is Thursday’s Bank of England meeting. Following the weekend’s announcement from Boris Johnson that England will enter into another lockdown as of Thursday, the market is now bracing for a large increase in the BoE’s QE programme. We are pencilling in a £100 billion increase in asset purchases, with Bailey to keep open the possibility of more rate cuts in 2021 without committing either way.

As for the euro, we expect it to be driven almost entirely by the US election this week. A number of Euro Area data releases will, however, be worth keeping tabs on. Revised PMI numbers for October on Wednesday, and September retail sales on Thursday could prove market movers.