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On Monday, trading in America ended with an increase of more than 1%, this positive trend was maintained on Tuesday. In ordinary times, such a rise could be called a rally. However, we are now dealing with a corrective pullback after a deep fall last week.
After the fall from the highs and the pullback have occurred, the markets are ready for any move. In this regard, the most reasonable decision would be to wait for the results of the voting in the US, which, in principle, many players do. It is almost impossible to predict the next step now. But judging by the sentiment of the markets, they are hoping for a victory for Joe Biden, whose presidency will be a testament that the economy will receive a lot of aid. Against this background, the dollar went on the defensive.
There are several scenarios for the outcome of the elections. Let's consider the main ones.
Donald Trump's victory
If Trump wins the race, then, it will come as a surprise to the markets as in the previous elections. The chances of a decline in the US dollar will be reduced. The dollar is likely to go higher as demand for defensive assets grows. Together with it, other currencies of the safe haven will rise in price - the Japanese yen and the Swiss franc.
Democratic Party's unconditional victory
Markets should take this news as positively as possible, as the likelihood of approving a large stimulus package and a return to multilateral diplomacy will skyrocket. At the same time, long-term bond rates will rise amid expectations of higher inflation. This is the outcome of events that will appeal to traders of the Australian, New Zealand, and Canadian dollars. These currencies will have the opportunity to grow well in the medium term against the US dollar and the Japanese yen.
Victory for Biden, but Republican control of the Senate
Things will become less predictable here. Perhaps there will be no active confrontation in trade and sanctions pressure on China. Meanwhile, the chances of a larger package of measures will diminish, which will hit market sentiment. The trends, of course, will be similar to the scenario of an unconditional victory for the Democrats, but they will be more restrained. The pressure on the dollar will increase, but not as pronounced as with the complete victory of the Democratic Party.
The losing side does not accept the election results
The most negative outcome for the markets is the scenario of contesting elections. The downward correction will be deep. Defensive currencies such as the Japanese yen, Swiss franc, and the US dollar will show strong upward gains versus cycle-dependent currencies.
The dollar index on election day moved away from a monthly high on Monday and held around 93.50. The yen also appreciated in recent weeks, and on Tuesday it remained stable at 104.64 per dollar. The euro consolidated at around 1.17 against the US dollar.
In general, the trading volume decreased, the rates remained almost unchanged, as the majority of investors took a wait and see attitude before the elections.
Implied volatility for the euro and yen was above 11% over the week. This is the highest value since the beginning of April.
Biden takes the lead in opinion polls. Note that early voting results in Texas and Florida may indicate a shift in market positioning. This is expected to happen between 23:00 and 01:00 UTC on Wednesday. Currencies like the yen and the franc will be more attractive if Trump has a chance to win.
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