USD saw a big overnight reversal that saw DXY rise from the low 93.00s to just under 94.30 and then back again. The reversal in USD’s fortunes has been closely tied to the market’s perceptions of the of incumbent President Trump’s re-election chances.
Going into the first vote count results out of early reporting states such as Florida, markets had been very risk on and were selling USDs, seemingly in the anticipation of a blue wave; i.e. Biden would deliver an early knockout blow to Trump in some of his must-win southern states such as Florida and Texas.
However, Trump did much better than expected early on, crushing it in Florida, taking Texas and picking up an early lead in crucial swing states such as Pennsylvania, Michigan, Minnesota and Wisconsin, all while seemingly being on course to deny Biden from victory in the likes of Georgia and North Carolina. Trump’s strong early performance boosted USD significantly as markets increasingly bet on a Trump re-election; Betfair at one point had Trump at 80% to win.
The early result was a big blow to the Democrats, whose hopes for an “blue wave” were dashed, as well as their hopes to regain the Senate. Republicans also seem to have done well in the House, picking up a few seats. Whoever the next President is, they will face a divided Congress, meaning it will be tough for them to get through their economic agenda. Thus, the Democrats can kiss goodbye to their corporation and income tax hikes, as well as their multi-trillion fiscal stimulus packages.
Back to how things unfolded last night; the tables started to turn in the European morning however. Trump’s re-election hopes started to fade as it become clear that the Democrats were making significant inroads in the West (Biden picking up Arizona and Nevada, for example). Moreover, Biden began catching up in some of the crucial rustbelt swing states. Indeed, Biden appears on course to win Wisconsin, Michigan and Pennsylvania, given the catch-up effect of counting the mail in ballots last (which favour Democrats) and Smarkets now give’s Biden an 80% chance of being elected; USD has thus retreated back to the low 93.00s.
In terms of what’s next for USD, there are a few things to consider…
Biden’s foreign policy is likely to be less protectionist and more supportive of global growth, all while his lack of full control over Congress will prevent him from pursuing a huge domestic fiscal stimulus package that would give the domestic economy a massive boost – this is a USD negative cocktail.
Hence, I expect USD could come under more pressure in the days leading up to/following the announcement of a Biden victory.
However, Trump does not look like he is going to go without a fight, and is already throwing shade at the legitimacy of the contest. He will most likely lose in court in attempts to have legally cast mail in votes nullified, but his insistence that the election has been stolen could provoke rage amongst his supporters, and the risk of violent clashes on the streets between hardcore Trump supporters and hardcore leftists is high. Trump’s lame duck session could get messy, and this could support safe havens such as USD or JPY.
Not that stocks are seeing it this way, however. The increasingly clear outcome of the election result (a Biden win) has seen stocks surge. If this surge continues, this could hurt USD.
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