WHAT WILL BE THE IMPACT OF THE US ELECTION ON THE FOREX MARKET?
The US presidential election in 2020, which will take place on November 3, will be one of the most memorable events of the year. As such, it represents a unique trading opportunity since traders can expect significant volatility around the time of the election. Investors and traders are keen to learn how will the 2020 US election affect the economy. In this article, we will examine the impact of the 2020 US election on currency markets, in particular on US dollar currency pairs.
Biden vs. Trump
In order to better understand the impact of the US election on the forex market, let’s begin with a brief look at the upcoming US election. The United States holds presidential elections every four years in the first week in November, with the Democrats and Republicans vying for control of the White House. President Donald Trump, a Republican, is running for a second term against the Democrat candidate, Joe Biden, who served as vice-president under Barack Obama. Many members of Congress are also running for office in the November election, but it is the presidential election that will command the attention of the markets, and indeed the entire world.
What has been the impact of the 2020 US election on the financial markets? The election has have garnered less attention than in ordinary times, as the number one news story across the globe remains the Covid-19 pandemic. The United States has been hit hard by the virus, with 7.7 million cases and 215 thousand deaths so far. With Covid-19 causing a severe downturn in the US economy and high unemployment, Americans have understandably been preoccupied with coping with Covid-19 and paying less attention to other issues. Despite this current state of affairs, the impact of the US election on the forex market should not be underestimated.
Impact of the US Election on the Forex Market: The United States Dollar
The US election 2020 is just a few weeks ago, and the impact of the US election on the forex market will be significant. Since the election is a domestic US event, traders can expect that the US dollar will show significant volatility. This presents traders with the opportunity to profit by taking positions on the US dollar. The currency pairs which could show the greatest volatility around election time include EUR/USD, AUD/USD and USD/CAD.
Impact of the US Election on the Forex Market: The Presidential Election Cycle
As far as the markets are concerned, a presidential election can be treated much like an economic release, where uncertainty exists until the event occurs. Traders seek to reduce the uncertainty ahead of the release of an event; can we lower the uncertainty in predicting who will become the next president?
One popular method to predict who will win the election is to rely on opinion polls, which are based on surveys of potential voters. In the current election campaign, President Trump has trailed Joe Biden in practically every poll, but the polls can be dead wrong, as we saw in the 2016 election. Hillary Clinton, the Democratic nominee, was heavily favored to sweep to victory, but in the end, Donald Trump won the election.
Another method that has gained popularity is the presidential election cycle. As we mentioned earlier, the United States holds presidential elections every four years in the first week of November. This regularity means that analysts can examine the data and trends from previous elections and look for patterns that could repeat themselves. Under the presidential cycle theory, there is a connection between the US dollar exchange rates and presidential cycles. For example, the US dollar historically goes into an election weaker, and once the uncertainty has cleared, the dollar appreciates. Researchers also have found that the US dollar has shown greater gains during the 4-year term of a Democrat president compared to when a Republican is a president. (Ashour, Rakowski and Sakar, Review of Financial Economics, May 2018).
To better understand this finding, we need to look at the very different economic policies of Republicans and Democrats. Generally speaking, Democratic presidents often implement policies which stimulate short-term economic growth and higher consumption, which causes the US dollar to appreciate in value. Republicans, on the other hand, usually promote a pro-business agenda, which may result in a weaker dollar. For example, President Trump has often said that that he wants to see a weaker US dollar in order to make US exports more competitive and often criticized the Federal Reserve for not lowering interest rates, which would cause the US dollar to depreciate.
Of course, even if we discern a clear trend in previous elections, there is no guarantee that the pattern seen in a previous election will repeat itself. As well, there have only been a limited number of presidential elections, so the sample size is rather small. The presidential election cycle can therefore be viewed as an oversimplification. Still, historical price moves can be useful in helping traders try to forecast the direction that the US dollar could take around the time of the election.
How will the US Election affect the Forex Markets?
As the clock winds down towards Election Day, volatility has been increasing in the forex markets, and this trend can be expected to continue as we get closer to the election. This means that the impact of US elections on forex markets has already begun. Traders can also expect to see significant volatility when the election results are published. An interesting twist is that Donald Trump has hinted that he may not accept the results if he loses the election. It is unheard of that a presidential candidate would contest the election results, but if this scenario does occur, it is very likely that the markets would respond with sharp volatility until it is clear who has won the election.
The impact of the US election on the forex market could be significant. According to a report by Goldman Sachs, an election win by Joe Biden could send the US dollar to lower levels. The report listed three key factors which will determine how the forex markets respond to the election, according to a report by Goldman, Sachs. The three factors are fiscal policy and the size of the budget deficit, tax policy and foreign policy. On all three fronts, President Biden could be expected to promote an agenda which would weigh on the US dollar. The Democrats would likely increase the budget deficit and possibly reverse some of President Trump’s tax cuts. As well, Biden could be expected to take a more conciliatory stance on China, in contrast to Trump, who has not hesitated to take on China in a bitter trade war and has also engaged other countries in trade disputes. Trump’s protectionist stance of “America First” would likely be replaced with a more harmonious US approach to global trade under the Democrats. This would increase risk sentiment, which means that investors would be more willing to move away from the safety of the US dollar and purchase riskier currencies, which would result in a weaker dollar. These factors are important to keep in mind as we try to determine how will the US 2020 election affect the market.
Watch this video: How the 2020 presidential election could affect markets (05mins 45secs)
Impact of the US Election on the Forex Market: The COVID Complication
How will Covid-19 affect the forex markets around the presidential election? Although the election is still a few weeks away, traders were treated to the effect that Covid-19 could have on the election when President Trump was admitted to hospital after testing positive for the virus, and then released from a hospital earlier this week. When Trump announced that he had contracted Covid-19, risk sentiment fell sharply, which boosted the US dollar. When Trump returned home after just three days and appeared to have recovered, the dollar went back down, as risk sentiment increased. If, however, it turns out that Trump has not made a full recovery, the US dollar could climb back up in response. Covid-19 can be viewed as this election’s “wild card”, as any dramatic developments, such as Joe Biden or the vice-presidential candidates testing positive for Covid-19 could cause significant volatility in the forex and other financial markets.
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The US presidential election, which takes place on November 3 is a key event for the financial markets. As such, it represents a unique trading opportunity for forex traders. The financial markets are already showing volatility due to the election, and this will likely continue until after the election. Traders should be prepared for volatility in the forex markets due to the US election, in particular, in US dollar currency pairs.
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