April 20, 2021 11:11 AM

2020 united states presidential elections

7 days out to the election and already over 60 million American citizens have cast their vote. Expectations are for this year’s election to be highest voting participation rate since 1908. This buy in from the electorate highlights how significant a moment it is for the American people and their policies moving forward. It is also may represent how strongly divided the nation is at present between party lines and their views of the current President – Donald Trump. One dynamic that we can forecast with certainty is that the American citizen wants his & her voice to be heard and they are casting their votes accordingly.

Our objective in this piece is not to forecast which candidate will win the election, but a scenario analysis of how the market will react to a range of different outcomes.

During his first term in office, President Trump has dramatically shifted relationships between America and its traditional allies. His administration has taken on China which has resulted in a “trade war” between the two largest economies in the world. We’ve seen a booming U.S economy, with record employment figures, crash following the Covid-19 pandemic thus year. It is with this backdrop that Joe Biden is presenting his case to the American people. He is trying to represent a return to the more traditional form of leadership. Focusing on curbing this spread of Covid-19. His administration promises to re-engage with leaders and step back from an “America first” protectionist policy. A long-term strategy regarding climate change is also part of their outlook.

blue wave – AUD positive

In this scenario – Joe Biden is elected, and the Democrats take control of both the House of Representatives and the Senate. Markets would view this in a positive light simply because it would provide clarity of what to expect over the coming years. Risk sentiment – initially – would bolden and as result one could expect the USD to weaken and the AUD to benefit. A Washington D.C, controlled by the Democrats, would seemingly be a less confrontational proposition.  This would give trading partners some form of peace of mind. The Australian market could well benefit from this as it has been managing a balancing act between its biggest ally and its most important trading partner.

trump wins – initial USD strength

Polling suggests this is not likely, however that was also the case in 2016. A second term for the Trump administration could well see the USD see bounce back, retracing some the losses we’ve seen over the past 6 months. The stock market could well rally also as Trump has previously leaned heavily on his record with Wall St. The rational for a recover in USD would be that the market would anticipate more of the same for the next 4 years. Tensions between the U.S and China could exacerbate. Furthermore, there has been no clear platform presented by the Republicans for a second term – the market would assume more of the same.

contested outcome – AUD under pressure, short term volatility

This is the least desirable for everyone involved. America’s divide is clear for everyone to see. Tensions are extremely high and a threat of civil unrest is a reality. A result that is contested by either side is likely to stoke the flames. The markets greatest foe is uncertainty. A scenario whereby the result is challenged or gets dragged to the Supreme Court would see a flurry to safe haven assets such as the USD. In this event, expect volatility and large swings driven by headlines and overnight developments. The AUD could test levels below the 70 cent. Expect short term volatility with some form of confidence returning in 2021 in this scenario.

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