Independent analysis firm InTouch FX recently surveyed is clients on expectations around the impending US election in November, finding that expectations for a Joe Biden win are not yet priced in and that the dollar may have further to fall.
“The US election is not expected to break the broader dollar downtrend,” says Todd Elmer, head of FX and Macro analysis for Asia at InTouch Capital Markets. “Our survey results suggest there is scope for investors to price in more short-term impact and delayed reporting of the outcome could prove a threat to risk appetite. However, the bulk of survey respondents saw USD weakness extending within three months of the election irrespective of the winner.”
The survey uncovered some unease with the polls and that a Donald Trump victory would be more positive for US stocks and the dollar. That said, expectations are that the election will not break the broader trend towards dollar weakness. A Biden victory combined with a changeover of Senate control is seen as the biggest threat to risk appetite.
Most investors believe that the upcoming election has factored into FX and asset market trade, however 65% of survey respondents believe that it has been only a ‘minor’ factor. compared to about 15% who see the election as a major factor and 20% who believe it has not factored at all. Combined with the fact that the overwhelming bulk of survey respondents see some degree of risk reduction as likely before the election, this signals that there should be room to further price in risks on the vote as the event grows closer. Nearly 81% of survey respondents anticipate a degree of risk reduction ahead of the election.
In line with some early election modelling, 73% of respondents say they expect Biden to win the election, although InTouch FX observes that the survey results favour Biden by a slightly larger margin that some betting markets – 57% of respondents expect the Republicans to lose control of the Senate, meaning that the legislative and executive branches would be unified under Democrat control.
Although polls have Biden some 8% ahead at this time, the InTouch FX survey finds a degree of scepticism, with 54% believing this over-states the likelihood of him securing victory within the electoral college. Given that 42% of respondents believe polls are roughly fair, InTouch FX says this means that less than 4% of respondents believe Biden’s lead is understated. Partly, this should just reflect the lay of the land. President Trump enjoys some structural advantages in the electoral college which means that even on a marginal victory in the national vote, Biden could still lose the election, such as was the case with Clinton in 2016. Nevertheless, the firm says, Biden’s advantage is wider than that enjoyed by Clinton at any point in the cycle in 2016, he is seen as having fewer unfavourables, there are fewer independent voters at present and performances in the mid-term and special elections suggest there is no ‘silent’ block of Trump voters. Indeed, the recent pattern of actual voting suggests that Trump’s base has shrunk among some key constituencies such as suburban women and older voters, InTouch FX says, adding, “This may explain why there is a degree of reticence to price in more election risk at present, but it is not clear to us that this suspicion of the polls is fully warranted. Coupled with the above findings, this adds to evidence that the election is not yet fully discounted.”
Around 50% of respondents expect the results to be known within one day of the election; 27% within one week and, interestingly, 21% within one month. “We see risk that investors are overly complacent on risks that vote tallying will prove ‘messy,” says InTouch FX. “Mail in voting is likely to accelerate sharply in the face of the pandemic and this means that simply on a mechanical basis it will take officials some time after the election to count votes. Given repeated assertions from the White House casting doubt on the legitimacy of such balloting, it would not be surprising if tensions rose as votes are counted and there will almost certainly be a number of legal challenges around the vote.
“As such, in the absence of a blowout in favour of one candidate, the risk may be for something roughly analogous the 2000 election when critical results from Florida were not determined for over one month,” it adds. “We believe this scenario should be negative for risk sentiment and asset markets and survey respondents appear to agree.”
This belief was backed up by the survey, which found 65% of respondents believe the dollar will fall if the election results are still unclear one week after the election and a full 90% of respondents expect non-dollar safe-havens to outperform risky currencies should this play out. A slightly lower percentage of survey respondents believe the SPX will fall in this scenario, with about 80% calling for declines.
Again using the 2000 election as a benchmark, InTouch FX observes that the reaction was most pronounced then in stocks with the dollar actually moving higher in a knee-jerk reaction to the uncertainty and the subsequent temporary flight to safety.
While unsurprisingly the majority of respondents see a Trump victory as more supportive for asset prices and the dollar, consensus on the currency is not strong with 47% expecting the dollar to rise within one week if Trump wins, 38% seeing it weaker, and the balance neutral. Around 60% expect the dollar to fall within one week of a Biden victory.
“The most striking conclusion on potential currency direction from the survey may be that there is limited expectation for the election to mark a break in the broader trend,” InTouch FX says. “A majority of survey respondents expect USD to be roughly unchanged or lower within three months of the election on a Trump victory, accounting for about 70% of responses. On a Biden victory, an even larger proportion of survey respondents expect USD to be lower or unchanged.”
It adds that considering elections since 2000, there is little consistency in either the SPX of dollar’s response in the run up and aftermath, “…elections do not appear to [have] marked major shifts in trend in most instances”. The vast majority of respondents see little change in 10 year yields, irrespective of the results.
Should Democrats take control of the Senate and the Presidency (along with maintaining control of the House as is overwhelmingly likely), 67% of survey respondents expect the dollar to fall, with only 17% anticipating a rise. In this scenario, 77% of respondents expect the SPX to fall, with only 6% anticipating a rise. Close to 70% of survey respondents expect non-dollar safe-havens to outperform risky currencies if the Senate is controlled by the Democrats. “Intuitively, this makes sense since the prevailing narrative is that Democrats may raise taxes and pursue less business-friendly legislation and regulation,” InTouch FX says. “Control of the Senate would allow Democrats to pursue a more ambitious policy agenda. That said, expectations on wholesale changes in policy have often failed to play out in similar situations in the past.”