An Uncertain Election Leads to Market Volatility

With no clear winner being called in the US election, electoral uncertainty is bleeding into the FX market. Even if a winner is declared, there’s no guarantee volatility will reduce.

It’s the nightmare scenario the markets had feared for the US Election: No confirmed winner and a President who is indicating he will only accept the result only if he wins. As Donald Trump announced he would be going to the Supreme Court to try and stop absentee ballots being counted, volatility returned to the market.

As things stand, neither candidate has enough electoral college votes to declare victory with counting likely to continue in battleground states such as Pennsylvania for a day or more. However, Donald Trump has, as many expected in this situation, tried to declare victory and cried fraud. He says he will now go to the Supreme Court to try and stop votes being counted.

The day before markets had been pricing for a Democrat landslide which would see a sweep of the Senate, House and White House. That is no longer happening, so they are having to adjust to new realities.

The ‘safe haven’ currency the Dollar has been trading heavily after Trump told supporters: “we will win this, as far as I am concerned, we already have.” Some betting markets began to price Trump as a slight favourite against his Democrat challenger although, at the time of writing, most experts still expect a narrow win for Biden.

Either way it signals the potential for a contested election which, like in 2000, could be settled in the Courts. Electoral uncertainty adds to pandemic volatility which sees investors skewing towards risk aversion. That has seen people move towards safe haven currencies which appears to be helping the dollar in the immediate term.

In the longer term, though, a poll from Reuters suggested that most analysts expected a relatively weak dollar regardless of who won the election, with the Greenback slipping against the Euro in the medium term. A Biden victory could see the dollar fall back as the former Vice President would be expected to introduce policies which would have a negative impact on the dollar price such as a fiscal stimulus.

A Trump win, on the other hand, could create more volatility in the market which could, in turn, boost the Dollar as a safe haven asset, although this would be counteracted by continued negative yield rates. For years, relatively high interest rates in the US compared to other developed countries attracted investors drawn in by high yields. These have fallen back this year which is why the Dollar has experienced such a second half of 2020 slipping back by 9% from March highs.

Whatever the medium and long term outlook, the markets are likely to be changeable for the coming days as the election is finally settled. The prospect of a protracted court battle could extend this volatility depending on the exact nature of the late results. This could have an impact on high beta currencies, which are traditionally highly influenced by volatility.

For now, the only certainty is uncertainty. With waters on the FX seas likely to get even more choppy it’s even more important to have a partner you can trust to steady the ship. FX experts, such as MillTechFX and Millennium Global, have significant experience in navigating and managing FX trading and dealing with volatility for our clients.