- Fresh polls confirms Biden's lead in key swing states
- Markets unwilling to fully buy into polling data
- USD expected to remain bid until vote outcome is clear
- Fresh concerns over postal ballots
- "Another Trump-in-the-box?" asks Danske
Image © The White House
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Joe Biden's lead in three key swing states appears to be stable according to polls out this week, yet markets still seem unwilling to shake a sense that a President Donald Trump could yet do better than the polls suggest.
It is this unwillingness by investors to fully buy into what the polls are saying - that Biden will comfortably win the vote - which will likely keep stock markets churning between gains and losses and the Dollar bid for at last the next week.
"The U.S. election campaign enters its final stretch. We think the main bias will be for the market to reduce risk and unwind positions when given the opportunity. This could see the USD firm near-term," says Mark McCormick, a foreign exchange strategist with TD Securities in New York.
Biden holds a comfortable lead in the three states that took President Trump to the White House in 2016 and there is as yet no evidence of a late polling shift in the president’s direction, as was the case in 2016 when favourite Hillary Clinton unexpectedly lost.
Three University of Wisconsin/YouGov polls out Monday found Biden leading by 10 points in Wisconsin (52%-42%), 9 points in Michigan (53%-44%), and 8 points in Pennsylvania (52%-44%).
Four years ago, polls gave Clinton the edge in all three states, however by this point in the race Clinton's lead was narrowing and not nearly as steady as Biden’s.
According to Forbes, if Biden holds on to the states Clinton won in 2016, and flips Michigan, Pennsylvania, and Wisconsin, he will win the election.
"At the 2016 Election, Trump won with a margin of 77 electoral votes to Hillary Clinton. Forty-six of the electoral votes (Michigan, Pennsylvania and Wisconsin) were won with a margin of less than 0.7pp, with Clinton leading the states polls comfortably going in to Election Day by at least 5pp in all three states," says Senior Analyst at Danske Bank, Mikael Olai Milhøj.
Above: The Dollar has found a bid of late, pushing GBP/USD lower. Protect your international payments budget by locking in today's exchange rate for use in coming months, find out more here.
"Looking at the 2020 Election, Biden has a smaller lead over Trump in the polls of these three key swing states compared to Clinton and stands to lose the Election with a similar swing as in 2016," adds Milhøj.
Georgia, a traditional Republican stronghold, has meanwhile become a Democrat target with an Atlanta Journal-Constitution poll out Monday finding Biden in a virtual tie with Trump (46.5-46.2). Biden is reported to be holding a rally in Georgia this week to try and flip the state.
A significant unknown in this election resides with mail ballots, with the huge volume of mail ballots potentially taking days or weeks to tally, experts have said.
The issue is already being contested with President Trump tweeting on Monday: "Big problems and discrepancies with Mail In Ballots all over the USA. Must have final total on November 3rd."
"The main issue of the 2020 polling, though, is the pandemic and the impact on voter turnout. Mail ballots complicate the election, the accuracy of voter sentiment could be high, but if voter turnout or the mail ballot rejection rate is skewed, polls could end up looking wrong again. Overall, we think that voter turnout uncertainty favours Trump slightly," says Milhøj.
According to the Associated Press, more people have cast ballots in this year’s presidential election than voted early or absentee in the 2016 race as the start of in-person early voting in big states led to a surge in turnout in recent days.
The opening of early voting locations in Florida, Texas and elsewhere has piled millions of new votes on top of the mail ballots arriving at election offices as voters try to avoid crowded places on November 03 during the coronavirus pandemic.
The result is a total of 58.6 million ballots cast so far, more than the 58 million that The Associated Press logged as being cast through the mail or at in-person early voting sites in 2016.
The uncertainty that this dynamic presents markets is key and could explain why investors are hesitating to rally and the Dollar remains well bid.
It is not that either candidate is particularly good for bad for the Dollar, instead the significant foreign exchange implications lie with a close result where the Dollar's 'safe haven' qualities would come to the fore.
"In the year of the pandemic, a negative correlation has been observed between the Dollar and the U.S. stock markets, testifying that the dollar’s safe haven status is back in the limelight," says Asmara Jamaleh, Economist at Intesa Sanpaolo.
The Pound-to-Dollar exchange rate has reflected Dollar demand by falling back from last week's highs at 1.3177 to trade back at 1.30 at the time of publication. (Set an automatic order to secure your ideal rate when it is reached, learn more here).
The Euro-to-Dollar exchange rate has found little meaningful traction for weeks now, topping out in the 1.1860 vicinity this October and is back at 1.18 at the time of publication. "Whilst our preference is for a weaker dollar, the negative market sentiment is preventing this move from trending EUR/USD higher," says Richard Perry, analyst at Hantec Markets.
"A contested election should result in a risk-off reaction due to the potential for binary outcomes and heightened uncertainty. It also makes a fiscal deal in the lame duck session more difficult to achieve since it narrows the window between Election Day and when the new Congress is sworn in (early-January)," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.
Above: The Dollar has lost ground against all major peers over the course of the past month, suggesting its 'safe haven' as a lone pillar of support.
The risk for foreign exchange markets is the vote is contested with a potential legal challenge being filed by either of the parties in the event of a close result.
This could allow for a period of limbo, creating uncertainty for markets and aiding the Dollar which tends to outperform in such conditions. The period of limbo is all the more debilitating given the perilous state of the economy and the inability of politicians to agree a new rescue deal, something that is now unlikely until after the election given Senate leader Mitch McConnell on Monday adjourned the Senate.
A clear-cut win for Biden as well as the Democrats taking control of the Senate is being seen by analysts as an optimal outcome for investors as it would allow for policy stability and the presentation of a sizeable fiscal boost in 2021.
If markets were to rally under such circumstances, the Dollar would likely fall. (See our 'blue wave' scenario report, which includes investment bank commentary and predictions).
But markets would also likely welcome a scenario whereby Trump retains the White House and the Republicans held the Senate; again it is not so much the individuals rather it is the avoidance of an uncertain outcome that matters for markets.
"We think a Trump re-election (status-quo) could cause some consternation over the broader USD outlook, at least initially," adds Rumpeltin. "A fiscal package might come more easily if Trump wins reelection and the Republicans retain the Senate. That could leave the USD more mixed overall."
The Real Clear Politics polling average shows Biden holds a national lead over Trump of 7.8 points, (Biden on 50.8% and Trump on 43.0%); there has been a narrowing of Biden's lead since October 11:
"Notably, the national polls have been among the most accurate in estimating the popular vote since 1936, while only the states polls have failed. One of the primary reasons the state polls failed is late vote decisions, with about 13% of voters in Wisconsin, Florida and Pennsylvania deciding in the final week and more than 67% of these voting in favour of Trump," says Danske Bank's Mikael Olai Milhøj.
"Another explanation for the polls getting the 2016 vote wrong is is the significant over-representation of college graduates in survey answers, but many state pollsters in particular did not adjust their weight correctly and thus overestimated Clinton’s support. Finally, the fraction of people not revealing their “true” vote was larger among Trump voters but data comparing phone and online surveys does not suggest this can be explained by ‘shy Trump voters’/the spiral of silence.
FiveThirtyEight say weighted-average error in polls in final 21 days of the campaign weighting by education was by far the most common methodology change reported by 15 of the main US pollsters.
"Other adjustments include weighting or paying attention to population density (which is positively correlated with the share of Democratic voters) and more polling in battleground states close to Election Day, especially for the key Upper Midwest states that proved decisive in 2016. Overall, the pollster are confident about the polls, according to the article, and the results from the 2018 mid-term election seemingly back this up, with an accurate prediction outcome in more than 95% of 506 races," says Milhøj.
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