- GBP could rise 2.5% in a month on a Biden win
- USD main winner of a Trump win
- Markets wary of weeks of political uncertainty ahead
Photo by Adam Schultz / Biden for President. Displayed under CC licensing
- GBP/EUR spot: 1.0942 | GBP/USD spot: 1.2838
- GBP/EUR bank rates: 1.0736 | GBP/USD bank rates: 1.2579
- GBP/EUR specialist rates: 1.0844 | GBP/USD specialist rates: 1.2722
- Learn more about market beating exchange rates, here
Number-crunching and analysis of options markets have allowed foreign exchange strategists at Barclays to arrive at some educated estimates as to how exchange rates might react to the outcome of November's presidential election, an event that is widely expected by the analyst community to trigger notable financial market volatility.
Options markets that allow investors to hedge against foreign exchange volatility at an important date in the future are useful in telling us how foreign exchange markets might actually move when that date comes around.
For example, volatility markets highlighted the importance of the June 2016 EU referendum in the UK months in advance because the cost of buying volatility hedges was extremely high. The surprise 'leave' vote was met with significant foreign exchange volatility, something that was signposted in advance.
This same volatility market is giving hints as to how foreign exchange markets might move in November, when the U.S. votes in the presidential election.
Research by Barclays shows volatility for the November 03 election has risen, but it has picked up even more for the period following the vote.
This could reflect the market's concern that an inconclusive result might result in weeks, if not months, of legal wrangling which could inject significant uncertainty into global financial markets.
"The upcoming US elections pose significant risks for financial markets, not only due to the unknown policy course of the next US president, but also due to the likely lengthy election process and potential social unrest associated with it," says Marek Raczko, an analyst with Barclays in London. "Market participants are getting worried more about the prolonged post-election legal disputes and social unrest than the election itself."
The team at Barclays have dug into the data from options markets further and find that the market is suggesting there could be larger foreign exchange market moves under a Donald Trump win than would be the case under a Joe Biden win.
In addition, the message is that a Trump win is broadly supportive of the Dollar, while the opposite is true for a Biden Win. This is a reaction shared by numerous other analysts, as per our earlier reports.
Having crunched the numbers on option markets covering the day following the result, Barclays have noted the Pound could rise 0.6% against the Dollar on a Biden win, but fall 0.8% on a Trump win. A month following the result the Pound could rise 2.5% under a Biden win and fall 3.5% under a Trump win. After six months the respective gain and loss for the Pound-to-Dollar exchange rate moves to 5.3% and -6.3%.
The Euro could meanwhile rise 0.5% the day after a Biden win and fall 0.6% on a Trump win. A month later the Euro-to-Dollar exchange rates's gain rises to 1.8% on a Biden win and the loss to -2.2% on a Trump win. The respective moves after six months is +3.7% and -4.1%.
The Dollar is meanwhile expected to outperform its peers over coming weeks as uncertainty over the outcome of the election continues to impact investor behaviour, confirming that 'safe haven' assets such as the Dollar will be favoured.
"The market will likely continue to be more focused on signs that the election outcome could be contested and delayed. In fact, although the 1d event vol for Election Day has increased steadily since March, recently the post-election vol has increased even more, as concerns mount about the potential delays of results. The USD can underperform safe-havens as JPY, CHF and some European currencies if uncertainty continues to increase," says Raczko.
A pro-U.S. Dollar atmosphere enveloped markets on Wednesday, September 30 as investors digested a rancorous debate between Biden and Trump, one that left many political commentators unimpressed as very little light was shone on actual policy positions.
The debate looks likely to be remembered for name-calling and hot personal exchanges.
Nevertheless the polling data suggests Biden had done enough to widen his lead on Trump amongst voters. According to electionbettingodds.com the probability of a Biden win has risen to 58.4% versus 55.3% just ahead of the debate and up from 51% four weeks ago.
The debates are unlikely to significantly alter the electoral environment that has consistently had Biden ahead of Trump.
"Democratic nominee and former Vice President Joe Biden looks to have an edge in the race, leading President Donald Trump by about seven percentage points in recent national polls. This lead has been remarkably stable this year," says Mike Pyle, Global Chief Investment Strategist at BlackRock Investment Institute.
"The U.S. election is taking place against a historic backdrop of a pandemic, recession and domestic strife. The outcome could have significant implications for key policy areas: fiscal stimulus, public investment, taxation, regulation and foreign affairs. It also has the potential to supercharge structural trends such as an increased policy and market focus on sustainability," says Pyle.
Blackrock says the covid-19 pandemic has helped create historically challenging circumstances for the election, including a leap in mail-in voting that could complicate vote counting, delay results and trigger legal challenges.
"We see a material risk of a contested election or a delayed result. Election day could turn into weeks or months," says Pyle.
Such an environment is unlikely to be one in which stocks rise and the Dollar falls.
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Goldman Sachs, UBS, Credit Suisse, JP Morgan give their views on the Dollar on a 'Blue Wave' outcome.
Trump's chances of re-election suffered a significant blow when the covid-19 crisis struck the U.S. in late February, leading to severe nationwide shutdowns that knocked the economy into reverse and pushed unemployment up sharply.
"Historically, the incumbent has had an electoral advantage, especially with a strong economy The only incumbent presidents since WWII who have not been re-elected were Gerald Ford, Jimmy Carter, and George Bush Sr, and under all of these, the U.S. economy had experienced a recession in the two years prior to the election," says Valentin Marinov of Credit Agricole.
Owing to the effects of the covid-19 shutdowns, the U.S. economy is seeing the kind of sharp deceleration and labour market deterioration that could put Trump in the same bracket as Ford, Carter and Bush Sr who were all one term presidents.
"The USD has benefitted significantly from President Trump’s policy mix of aggressive fiscal stimulus at home and trade protectionism abroad. This could come to an end if a Democratic president is elected," says Marinov.
A change in guard would naturally go some way in overturning Trump's policies that were ultimately supportive of the Dollar.
According to Crédit Agricole, there are five reasons why a Democrat president could be less supportive of the U.S. Dollar:
- Fiscal austerity measures (including higher taxes) may be needed to address the significant deterioration in the US fiscal deficit and accommodate calls for an overhaul of the healthcare system
- Less aggressive protectionist policies especially against NATO allies in Europe
- More regulation for energy and financial companies
- The White House ‘influence’ over the independent Fed could ease
- Producing a potentially weaker growth outcome than if President Trump is re-elected
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