• Joel

USD Risk Incoming: Trump Vs Biden First Debate Tonight!

Arguably the most important moment of the week approaches tonight!

At 0200BST/2000EDT, US President Trump will take on Democratic Presidential hopeful Biden in the first of three live televised debates, this first one being moderated by Fox News’ Chris Wallace (a registered Democrat).

The 90-minute debate will cover six topics of questioning, including; 1) "The Trump and Biden Records," 2) "The Supreme Court," 3) "Covid-19," 4) "The Economy," 5) "Race and Violence in our Cities" and 6) "The Integrity of the Election," according to the Commission on Presidential Debates.

Expect Biden to press Trump on recent reports regarding the President’s lack of tax paying over the past 15 years, over his Covid-19 response and also over recent reports that his campaign sought to supress the black vote back in 2016.

Meanwhile, Trump may bring up alleged Biden corruption and hammer him for his initially soft stance on looting and racial violence in the US over the last few months.

One factor that might work against Trump is the fact that his campaign has relentlessly pushed the narrative that Biden is senile and demented over the past few months. Should Biden put in a strong, sharp performance tonight, some voters with doubts about Biden’s mental faculties might find themselves “pleasantly surprised”. In others words, Trump has set the bar very low for a good Biden performance.

In terms of how the winner vs loser of this first debate will be judged, we will need to pay close attention to the national polling over the remainder of the week.

Markets will be on notice for any shift in the current polling (Biden leads Trump by an average of 7% depending on what poll you look at) back in favour of Trump, or indeed further in favour of Biden.

Note that, historically, Presidential debates have had little sway on polls; The Economist estimates “from past contests, that the chances of an eight-point swing (The Economist’s estimated Biden lead) to the incumbent after the debates have been roughly one in 20. In other words, there is only a 5% chance that the debates could erase Mr Biden's lead.”

Market Reaction

Current polling suggests that Biden will win the election in a clear victory, i.e. not giving Trump the chance to contest the election in the Supreme Court and, in doing so, creating a period of high political uncertainty.

However, markets are clearly still fearing that a contested outcome might happen. With Trump vowing not to give up the Presidency easily, this has been attributed as a key source of financial market volatility over the past week or so (and has been a driver of USD upside).

If Biden widens his lead following this election, which he could well do given the low bar for his performance set by Trump, this might dampen financial market volatility in the coming weeks prior to the election, which will likely end up being stock positive and USD negative. Indeed, Goldman Sachs today released a public note saying that “a democrat sweep could have a modestly positive net impact on the trajectory of S&P 500 profits”, largely (I expect) because the benefit of large fiscal stimulus you could expect from the democrats would outweigh the costs of higher corporate taxation policy.

Conversely, if Biden lives up to the low expectations set by Trump in recent months (leaving some voters with the impression that he has lost mental sharpness over the last few years), we could see a slip in Biden’s lead.

Given that this would increase the probability of a contested outcome, that could be a stock negative/USD positive.

However, most analysts agree that once market have full certainty back (i.e. in knowing who the President will be over the next four years), this ought to be risk asset positive. "Regardless of the outcome, the resolution of the election should help reduce equity risk premium and support valuations", says Goldman Sachs.

Another factor to consider is the potential for both Trump and Biden to go in hard on China, in an effort to appease the majority of US voters, who are becoming increasingly distrustful of the country (in part thanks to their handling of the Covid-19 pandemic). Such rhetoric could be CNY, AUD and NZD negative (and USD positive through this channel). 


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