Today marks three weeks until the US Presidential election. Democratic Presidential Candidate Joe Biden leads rival and incumbent Donald Trump by some 10 percentage points. Some weeks ago, despite a lead in the polls, betting markets were more stubborn to revise the probability of a Biden win upwards. The presupposition of a silent majority in favour of Trump caused a dislocation between people’s mouths and their money. However, with only three weeks to go probability studies are affording him a 67% chance of winning the U.S Presidential election on 3rd November. The commanding lead of the former Vice President is prompting markets to react to a Democratic victory and price in the prospect of a Biden presidency. So, how do you price in the prospect of the White House turning Blue once again?
The foreign exchange market is a prime candidate to express election risk. Unsurprisingly, the US currency itself is one instrument that participants are turning to within this liquid market. As we have mentioned before, Trump’s bias towards taxation cuts and deregulation makes him the most dollar-positive presidential candidate. Despite consistent criticism of the Federal Reserve’s relatively tight monetary, Trump’s term in office was characterised by trade protectionism that also encouraged strong defensive demand into the safehaven currency. In contrast, the Democrat’s persuasion towards higher public spending with its left-leaning economic policy could undermine the trend of long-run Dollar strength. The potential for direct monetary financing in response from the Federal Reserve or higher taxation rates to accommodate this agenda would almost certainly push the greenback lower.
For the past two months the speculative component of the foreign exchange market has held a short exposure to the US Dollar for the first time in over two years. This move both reflected the debasement risk created by the rapid debt creation of political institutions and the immense quantitative easing measures introduced by the Federal Reserve. Increasingly, the rising probability of a bearish result in the presidential election has encouraged further short positioning in the greenback. Over the weekend, Goldman Sachs joined the likes of UBS and Invesco in publishing a recommendation to sell US Dollars. Not for the faint of heart, they recommended shorting the Dollar against the Mexican Peso, Indian Rupee and South African Rand, three currencies expected to benefit from a more stable foreign policy from a Biden White House.
The Chinese Yuan continues to be a popular bet to reflect the potential for a Biden win. The past four years of Trump were marked by a trade war between the US and China with the Yuan weakening past 7 to the Dollar on two distinct occasions. The prospect of warmer trade relations between the US and China is encouraging the Yuan to pick up value against a backdrop of positive 2020 economic growth.
Discussion and Analysis by Charles Porter