By Jamie Jemmeson ACSI, MSTA at Infinity International
It was a shock in 2016 when celebrity Republican nominee Donald Trump seized the White House against the odds; that said Brexit and Leicester City’s Premiership crowning were also unlikely events. Four years on and President Trump’s re-election campaign is looking wounded with his management of COVID-19 and the resulting fallout hurting his chances.
Data from Real Clear Politics (RCP), a poll aggregator and news source, shows how his approval rating has slipped since the start of April; the height of COVID-19 which resulted in the loss of close to 20 million jobs at one stage.
Fig 1 = RCP Poll Average
At the time of writing (24 June 2020), based on RCP betting odds aggregator, Democrat Joe Biden has a greater than 60% probability of winning the race to the White House (see Fig 2). However, ruling out President Trump would be foolish based on his accomplishments previously. However, it would not be a surprise if we see the nation’s currency weaken as we approach the election as uncertainty increases.
Fig 2: Betting odds
What does a Joe Biden win mean for the US dollar?
While we recognise that there is a long way to go in the Presidential race, it is worth noting that markets often base value on the balance of probabilities which helps to explain and partly rationalise the reason why the US dollar is on the back foot. Since 1940 there has only been one incumbent losing at this point in the cycle who would go on to win. President Truman, like Trump, was down around 10 points and came back to win.
Based on history, it appears that President Trump is facing an uphill challenge to turn this around. Assuming Joe Biden wins the race to the White House, what does this mean for the longer-term prospects for the US dollar?
President Trump’s slogan was “Putting America First” which when he came to power, he was not shy of implementing enforced tariffs on both the EU and China while cutting taxes at the same time. Also, President Trump was not candid on his criticism of the Federal Open Market Committee (FOMC) in its use of interest rates to cool the economy.
President Trump’s administration policymaking has resulted in a stronger USD in recent years, as a result, markets may associate Joe Biden with a weaker US dollar as various policy and stances are unwound as bridges to foreign partnerships may be reconstructed.
Crédit Agricole research recently stated that the US dollar could weaken under Biden for the following reasons: 
- Fiscal austerity measures (including higher taxes) may be needed to address the significant deterioration in the US fiscal deficit and accommodate calls for an overhaul of the healthcare system
- Less aggressive protectionist policies especially against NATO allies in Europe
- More regulation for energy and financial companies
- The White House ‘influence’ over the independent Fed could ease
- Producing a potentially weaker growth outcome than if President Trump is re-elected
However, we are in unprecedented times where trying to forecast what will happen even next week can sometimes be a challenge. There are other factors to consider regarding the strength of the US dollar. COVID 19 will likely continue to play a part in the race to the White House. Currently, new cases are at higher levels than we observed in March/April. If President Trump can get this under control, the perception may change. Geo-political tensions between the US and China may continue to make headlines and drive sentiment.
Of course, there are some outlying scenarios. Fox News published an article that stipulated that Trump may drop out of the race. Another factor could be dependent on COVID-19 and may restrict the Presidential Election taking place.
What are the Financial Institutions thinking?
We compiled the below forecast using data taken from over 40 financial institutions to predict the high, low and mean forecasts, for the next 6-months: covering the lead up to Presidential Election. As can be seen, there are large differentials between the high and lows which highlight the potential volatility that could happen during this period as we ride ebbs and flows of sentiment, COVID-19 and the Presidential Election.
Hedging tools for business
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This blog post is intended to provide you with information on the services Infinity International Limited (IIFX) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. IIFX is a company registered in England with registered number 06333730 and registered address at Third Floor, 24 Chiswell Street, London, United Kingdom, EC1Y 4YX. IIFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (FRN: 567835) for the provision of payment services. IIFX is authorised and regulated by the Financial Conduct Authority in the conduct of designated investment business (FRN: 671108).