FX Update: Contested election ahead after Trump-quake, Part II?
Summary: The US mainstream media and polling industry has fatally eroded its credibility in this election cycle after the apparent 8-10% lead Biden enjoyed in their polls was a complete mirage and Trump has made this election another nail-biter on par with 2016, even amid a higher overall turnout. The final key takeaways for markets still hang in the balance, but the menu of possible outcomes has narrowed.
The fall-out and reckoning from this election will echo for years, but the headline is that we have witnessed a second “Trump-quake” repeat from 2016, as least in terms of his strength in the polls relative to what the mainstream polling industry was predicting. Their methods deserve a quick and quiet death after this fatal error and soul-searching in the entire complex and former main-stream media that relies on them will abound. We still don’t know the outcome of the election, but the extremely close result almost guarantees that the apparent loser will not go down easy.
Today’s FX Trading focus:
Waiting for the result first and foremost
The result of the election is still unknown and looks like that may remain the case well into today in the US time zones. The chief uncertainty is the last portion of the counts in states like Wisconsin, Michigan and Pennsylvania, the three key states that were the difference for Trump in 2016. Late mail-in votes there tilt Democratic and are still keeping a sense of suspense, as is the tight situation in Nevada. To make the situation even more fraught, US President Trump was out speaking in the middle of the night in the US and essentially declared victory and asked the Supreme Court to stop the counting, a shocking turn of events.
The menu of outcomes has narrowed
The only thing we have fully realized is that the menu of likely outcomes has narrowed severely, with all thoughts of a Democratic Blue Wave (much less Tsunami) completely out the window, although we still don’t know whether we face a split Congress as the Senate outcome is also up in the air. If the Senate is 50-50, the stakes for the presidency are that much greater (and one key seat in Georgia won’t be decided until a January 5 run-off as if the situation wasn’t dicey enough.)
For FX, what does it mean?
The situation is too fast developing to offer anything but a rough sketch here, but there are three possible outcomes and how currencies might treat them in coming days:
Contested election pointing to Trump eventual win: In this scenario, Senate control is largely irrelevant because the Dems retain the House. If Trump has the votes after the final tallies are in, there will no doubt be a challenge from the Democratic side and period of uncertainty, but the market will generally like this outcome and celebrate it with USD strength (less stimulus) and strong risk sentiment. The mood may change quickly on questions of how Trump and the Democratic House deal with the need for fresh stimulus, however, but Trump is no ideologue and will be happy to do what it takes as long as he can tilt more of the money toward his base rather than toward Dem state handouts, which he would like to starve. Social unrest is a big wildcard, however, but reflation narrative is potentially weakened for months under this scenario.
Contested election pointing to narrow Biden eventual win but with no Democratic control of the Senate (highest probability at present? But Trump won’t go down easy….) : this is more difficult to call on the dollar direction, but is very bad for risk sentiment as stimulus prospects would prove very dicey for lame duck session on frustrated Trump and early in Biden presidency on blocking Senate. Risk off is theoretically USD positive scenario but that reaction could stumble quickly. This scenario likely most positive for the JPY if global risk sentiment nosedives on the general uncertainty and risk of deflationary concerns. Longer term, however, I wouldn’t expect it to change the path to a reflationary narrative and weaker US dollar. Desperation would be in the driver’s seat eventually and keep stimulus forthcoming.
Contested election pointing to Biden and getting 50-50 in the Senate: To my non-expert eyes, the math for this outcome looks very challenging for the Democrats. But if this result somehow emerges, it will allow at least a weak version of the “Blue Wave” scenario as Biden would have the votes in Congress to push through major stimulus if there is total party discipline (and key independent Senators arms are twisted). This is a slightly more modest version of the risk-on, USD negative, especially EM- and commodity currency positive outcome the market was pricing in just ahead of the results rolling in.
This analyst will eat large helping of humble pie
Egg all over Yours Truly’s face after believing that Biden was entering this race with a commanding lead in the national polls. In retrospect, there were two mistakes I made in making my assessment for this cycle. The first was believing that the polls reflected the reality on the ground and in the electorate that would turn up on Election Day and that we might see a repeat of 2016, in which the broad polls for several days before the election actually proved very close to the final margin. This was very wrong in 2020!
The other narrative I mistakenly bought into was that turnout would prove almost universally Biden positive as the election was largely a Trump referendum and anti-Trump voices, especially among the young, would prove decisive. This does look to have been partially the case in some places (Georgia for sure – but Texas may prove far more "purple" (small R win) as well) but not elsewhere (Florida). I think the factors driving the final result and tilt far more in favour of Trump than was expected – even if we get a Biden win by the hair of his teeth – were outlined in my piece over the weekend on “What if I am totally wrong?” as Trump clearly won the enthusiasm and narrative game relative to expectations and among his base - an unbelievable feat given Covid-19 pandemic.
Value in NOK?
Crude oil prices are beating a steep retreat on surging Libyan crude oil production on the supply side (and those fearing a strong Democratic sweep will fear the arrival of more Iranian barrels of crude as well) while on the demand side, the latest series of lockdowns across Europe and perhaps on anticipation that the US could be headed the same way are weighing. On that latter note, we’re not very likely to see anything remotely comprehensive in terms of restrictions on the US front as long as Donald Trump is in the White House, which he will be at least up until Inauguration Day 2021. Sure, the downside threats to oil remain, but we are likely “getting there” in terms of putting in a market low as the kind of shock that sent oil prices nominally negative in the US futures market is unlikely to repeat. And even when we saw that remarkable development back then, together with conjecture of whether things were getting so bad in general that the authorities might have to shut markets, NOKSEK, to take an example, only managed to close down below 0.9000 on one single daily close. With NOKSEK poking below 0.9300 this morning, the pair feels like a good value trade for the long term – and possibly provides some volatility protection at the margin relative to trying a NOK long via EURNOK shorts, as NOK and SEK would both likely suffer during liquidity panics. Of course, traders should note that it is an illiquid pair, so pricing a large trade in volatile markets can prove a challenge.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
The fall-out and reckoning from this election will echo for years, but the headline is that we have witnessed a second “Trump-quake” repeat from 2016, as least in terms of his strength in the polls relative to what the mainstream polling industry was predicting. Their methods deserve a quick and quiet death after this fatal error and soul-searching in the entire complex and former main-stream media that relies on them will abound. We still don’t know the outcome of the election, but the extremely close result almost guarantees that the apparent loser will not go down easy.
Today’s FX Trading focus:
Waiting for the result first and foremost
The result of the election is still unknown and looks like that may remain the case well into today in the US time zones. The chief uncertainty is the last portion of the counts in states like Wisconsin, Michigan and Pennsylvania, the three key states that were the difference for Trump in 2016. Late mail-in votes there tilt Democratic and are still keeping a sense of suspense, as is the tight situation in Nevada. To make the situation even more fraught, US President Trump was out speaking in the middle of the night in the US and essentially declared victory and asked the Supreme Court to stop the counting, a shocking turn of events.
The menu of outcomes has narrowed
The only thing we have fully realized is that the menu of likely outcomes has narrowed severely, with all thoughts of a Democratic Blue Wave (much less Tsunami) completely out the window, although we still don’t know whether we face a split Congress as the Senate outcome is also up in the air. If the Senate is 50-50, the stakes for the presidency are that much greater (and one key seat in Georgia won’t be decided until a January 5 run-off as if the situation wasn’t dicey enough.)
For FX, what does it mean?
The situation is too fast developing to offer anything but a rough sketch here, but there are three possible outcomes and how currencies might treat them in coming days:
Contested election pointing to Trump eventual win: In this scenario, Senate control is largely irrelevant because the Dems retain the House. If Trump has the votes after the final tallies are in, there will no doubt be a challenge from the Democratic side and period of uncertainty, but the market will generally like this outcome and celebrate it with USD strength (less stimulus) and strong risk sentiment. The mood may change quickly on questions of how Trump and the Democratic House deal with the need for fresh stimulus, however, but Trump is no ideologue and will be happy to do what it takes as long as he can tilt more of the money toward his base rather than toward Dem state handouts, which he would like to starve. Social unrest is a big wildcard, however, but reflation narrative is potentially weakened for months under this scenario.
Contested election pointing to narrow Biden eventual win but with no Democratic control of the Senate (highest probability at present? But Trump won’t go down easy….) : this is more difficult to call on the dollar direction, but is very bad for risk sentiment as stimulus prospects would prove very dicey for lame duck session on frustrated Trump and early in Biden presidency on blocking Senate. Risk off is theoretically USD positive scenario but that reaction could stumble quickly. This scenario likely most positive for the JPY if global risk sentiment nosedives on the general uncertainty and risk of deflationary concerns. Longer term, however, I wouldn’t expect it to change the path to a reflationary narrative and weaker US dollar. Desperation would be in the driver’s seat eventually and keep stimulus forthcoming.
Contested election pointing to Biden and getting 50-50 in the Senate: To my non-expert eyes, the math for this outcome looks very challenging for the Democrats. But if this result somehow emerges, it will allow at least a weak version of the “Blue Wave” scenario as Biden would have the votes in Congress to push through major stimulus if there is total party discipline (and key independent Senators arms are twisted). This is a slightly more modest version of the risk-on, USD negative, especially EM- and commodity currency positive outcome the market was pricing in just ahead of the results rolling in.
This analyst will eat large helping of humble pie
Egg all over Yours Truly’s face after believing that Biden was entering this race with a commanding lead in the national polls. In retrospect, there were two mistakes I made in making my assessment for this cycle. The first was believing that the polls reflected the reality on the ground and in the electorate that would turn up on Election Day and that we might see a repeat of 2016, in which the broad polls for several days before the election actually proved very close to the final margin. This was very wrong in 2020!
The other narrative I mistakenly bought into was that turnout would prove almost universally Biden positive as the election was largely a Trump referendum and anti-Trump voices, especially among the young, would prove decisive. This does look to have been partially the case in some places (Georgia for sure – but Texas may prove far more "purple" (small R win) as well) but not elsewhere (Florida). I think the factors driving the final result and tilt far more in favour of Trump than was expected – even if we get a Biden win by the hair of his teeth – were outlined in my piece over the weekend on “What if I am totally wrong?” as Trump clearly won the enthusiasm and narrative game relative to expectations and among his base - an unbelievable feat given Covid-19 pandemic.
Value in NOK?
Crude oil prices are beating a steep retreat on surging Libyan crude oil production on the supply side (and those fearing a strong Democratic sweep will fear the arrival of more Iranian barrels of crude as well) while on the demand side, the latest series of lockdowns across Europe and perhaps on anticipation that the US could be headed the same way are weighing. On that latter note, we’re not very likely to see anything remotely comprehensive in terms of restrictions on the US front as long as Donald Trump is in the White House, which he will be at least up until Inauguration Day 2021. Sure, the downside threats to oil remain, but we are likely “getting there” in terms of putting in a market low as the kind of shock that sent oil prices nominally negative in the US futures market is unlikely to repeat. And even when we saw that remarkable development back then, together with conjecture of whether things were getting so bad in general that the authorities might have to shut markets, NOKSEK, to take an example, only managed to close down below 0.9000 on one single daily close. With NOKSEK poking below 0.9300 this morning, the pair feels like a good value trade for the long term – and possibly provides some volatility protection at the margin relative to trying a NOK long via EURNOK shorts, as NOK and SEK would both likely suffer during liquidity panics. Of course, traders should note that it is an illiquid pair, so pricing a large trade in volatile markets can prove a challenge.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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