Since 1788, every fourth year has brought an election for the Presidency of the United States. During such years, candidates from all walks of life dedicate their time, money and effort in an attempt to earn the highest American political office. While only a select few ever become the President of the United States (POTUS), the electoral process in itself is an institution.
Presidential elections are often turning points in the American history, stimulating social dialogue, economic debate and market tumult. No matter which candidate emerges victorious, the path to the presidency can be a fundamental driver of forex exchange rate volatility.
The U.S. Electoral Process
Following the U.S. gaining independence from Great Britain in 1776, American leadership has sought to preserve a representative form of government. Although the decade following succession brought ambiguity, the governmental structure crystallised with the 1787 writing of the U.S. Constitution.
Upon being ratified by each state in the union, the Constitution put into place a formal governmental structure and electoral procedure. The power of the government was to be divided into three separate branches tasked with unique duties: the legislative (write laws), judicial (interpret laws) and executive (enforce laws).
Aside from the judicial, members of the other two branches were to be publicly elected. Further, Article II, Section I of the Constitution states that the POTUS is head of the executive branch and is selected as follows:
"Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress."
"The Congress may determine the Time of chusing the Electors, and the Day on which they shall give their Votes; which Day shall be the same throughout the United States."
According to the verbiage put forth in the Constitution, the POTUS is not determined by the popular vote but instead by representatives of the people called "electors." This group of electors is referred to as the "Electoral College." Thus, the U.S. technically classified as being a constitutional federal republic.
The Electoral College consists of 538 members (as of March 2020). To win the presidency, a candidate must secure a simple majority of 270 electoral votes. Ahead of 2020, the most recent presidential election was decided in 2016. In a surprise to most political pundits, Republican candidate Donald J. Trump won the presidency by a margin of 304 to 227, with seven votes of "other" cast. The election's unforeseen results brought periods of extreme volatility to the commodity, equity and currency markets.
Structure Of An Election Year
Although the Constitution is the ultimate "law of the land," modern American politics has evolved the electoral process. Campaign efforts now last upwards of two years, with candidates allocating resources to gain media exposure, secure party support and raise funds.
Technically, the POTUS electoral cycle runs from February to November of the election year. During this period, primaries, party conventions, debates and the final vote are conducted. All of these events are capable of bringing volatility to the U.S. dollar (USD) and currencies around the world.
A presidential primary is a pre-election where voters determine which candidate they want to represent their party. Each state holds a primary, which is decided by the outcomes of precinctual debates known as caucuses. At the caucuses, delegates are chosen by registered party voters, predominantly Republican or Democrat. The delegates attend their party's national convention later in the year and are tasked with nominating a presidential candidate.
Primaries are an essential part of the electoral process. As the year unfolds, there are several periods and events that are especially important:
- Iowa Caucuses (Early Feb.): Since 1972, Iowa has been the first stop on the primary calendar. The results from Iowa offer insights into early party affiliations and can impact fundraising efforts.
- Super Tuesday (Early March): Super Tuesday is a critical time for presidential candidates and it features primaries in more than a dozen states and municipalities. Typically, Super Tuesday is a make-or-break day for many aspiring candidates.
- March: Including Super Tuesday, the majority of states hold their primaries in March. Over the course of the month, the field of candidates narrows significantly.
- April Through Early June: The remainder of primaries are held and leading contenders emerge.
For more information on this year's primaries, please visit the Los Angeles Times' article.
Due to the fact that a POTUS may serve no more than two consecutive terms (8 years), each primary season features a unique set of circumstances. In years where the POTUS is up for re-election, the incumbent runs largely uncontested. During such years, opposition primaries typically feature a multitude of candidates. Upon a two-term POTUS leaving office, both primary seasons are hotly contested.
The impact that a primary season can have on the forex depends upon the dynamic of the election cycle. For instance, 2016 featured two-term Democrat Barack Obama exiting the White House. To fill the vacancy, a wide range of Republican and Democratic hopefuls campaigned for their party's nomination. The result was a period of uncertainty for the USD and bearish performance vs the majors. From 1 February 2016 to June 1 2016, the Greenback lost value globally:
- EUR/USD: The EUR/USD rallied 299 pips(+ 2.7%).
- GBP/USD: Despite the looming U.K. Brexit Referendum, the GBP/USD gained 232 pips (+1.6%).
- USD/CAD: Values of the USD/CAD dropped by 875 pips (-6.2%).
- USD/CHF: USD/CHF rates fell 684 pips (-6.7%).
- XAU/USD: Spot gold spiked higher by US$97.05 per ounce (+8.6%).
Past performance is not indicative of future results.
Following primary season, political parties nominating a candidate for the U.S. presidency hold their national conventions. The national convention is the culmination of the primary process; it is the stage on which presidential candidates are officially chosen. At the convention, delegates cast their votes pledged during the primaries for the desired party candidate.
For the 2020 electoral cycle, the national conventions are held on the following dates:
- Democratic National Convention: 13-16 July 2020
- Republican National Convention: 24-27 August 2020
During the election of 2016, there was little uncertainty surrounding the eventual candidates. On the Democratic side, front-runner Hillary Clinton garnered a majority of the support and earned the nomination. In response to the news, forex traders took a bearish view of the Greenback. During the week of the 2016 Democratic National Convention (25-28 July 2016) the USD lost market share vs the majors:
- EUR/USD: Currency traders bid the EUR/USD higher by 194 pips (+1.78%).
- GBP/USD: The GBP/USD rallied by 114 pips (+0.87%).
- USD/CAD: Values of the USD/CAD fell 82 pips (-0.63%).
- USD/CHF: Bearish sentiment dominated the USD/CHF, driving rates down 174 pips (-1.76%).
- XAU/USD: Spot gold drew interest, rallying by US$28.91 per ounce (+2.19%).
On the Republican side, Donald Trump was expected to receive the nomination. However, a fraction of Republicans held back support and debated the validity of convention rules. While the convention was contentious at times, the Republicans eventually came to an agreement to nominate Trump. However, the heated nature of the event led to a volatile USD during the week of the convention (18-21 July 2016):
- EUR/USD: EUR/USD rates fell by 56 pips (-0.51%).
- GBP/USD: The GBP/USD lost 64 pips (-0.49%) on the session.
- USD/CAD: Bidders sent the USD/CAD significantly higher by 160 pips (+1.24%).
- USD/CHF: Bullish sentiment in the USD/CHF sparked a rally of 50 pips (+0.52%).
- XAU/USD: Spot gold lost ground by US$15.17 (-1.13%).
Past performance is not an indicator of future results.
Although not recognised as being a traditional forex market driver, uncertainty can arise out of the national conventions. If a candidate does not command a majority of primary delegates, a convention may become "brokered." Brokered conventions are rare―the last for both the Democrats and Republicans was in 1952.
For any aspiring candidate to become the next POTUS, performing well in a series of televised, live debates is an essential part of a successful campaign. Since the first televised debate in U.S. history (1960, Kennedy/Nixon), an impetus has been placed on such events.
An untimely error or surprisingly strong showing in a presidential debate can boost support among the electorate. Subsequently, forex volatility is possible in the hours and days surrounding these engagements. Below is a look at the 2020 presidential debate schedule:
- First Presidential Debate: Tuesday, 29 September
- Second Presidential Debate: Thursday, 15 October
- Third Presidential Debate: Thursday, 22 October
Similar to the national conventions, debates aren't fundamental drivers of market volatility. Nonetheless, they can greatly influence public opinion and are capable of delivering surprises. In the event that a candidate's chances appear to become compromised during a debate, a swift forex reaction for or against the USD is possible.
2020 Election Year's Impact On Market Performance
When compared to 2016, the 2020 electoral cycle brought a much different scenario. With the sitting POTUS Donald Trump seeking a second term, a broad field of Democratic candidates vied for the nomination. The contest hit a turning point on 3 March 2020 following Super Tuesday.
3 March 2020: Super Tuesday
Going into Super Tuesday, polling data showed Bernie Sanders to be modestly ahead of Joe Biden. Following a string of primary victories in favour of Biden, forex traders exercised caution on the Wednesday, 4 March 2020 session:
- EUR/USD: The EUR/USD fell by 35 pips (-0.32%).
- GBP/USD: Rates of the GBP/USD rose by 59 pips (+0.46%).
- USD/CAD: Traders of the Loonie fought to a stalemate, with rates unchanged.
- USD/CHF: The safe-haven USD/CHF rose by a modest 6 pips (+0.07%).
- XAU/USD: Gold weakened by US$3.90 per ounce (-0.24%).
Past performance is not an indicator of future results.
Although the spread of the novel coronavirus (COVID-19) and subsequent FED actions impacted valuations, Super Tuesday's result brought added uncertainty to the forex. If nothing else, the limited volatility of the 4 March 2020 forex session illustrated how primary season is factored into the currency trade.
10 March 2020: Super Tuesday II
Biden's strong showing on Super Tuesday produced a clear front-runner for the Democratic nomination. Upon the final tally becoming known, the field of candidates was effectively narrowed to three: incumbent Donald Trump (Republican, unopposed), Joe Biden (Democrat) and Bernie Sanders (Democrat).
However, the round of primaries held on 10 March, nicknamed "Super Tuesday II," further solidified Biden as the favourite in the Democratic race. A clean sweep of contests in North Dakota, Washington, Idaho, Michigan, Missouri and Mississippi extended his delegate lead.
Financial market activity on 10 March was largely chaotic, driven by the COVID-19 pandemic and subsequent media coverage. Although not a premier market underpinning, the political developments on Super Tuesday II contributed to the volatility of the 10 March 2020 forex session:
- U.S. Equities Indices: Both the DJIA (CFD: US30) and S&P 500 (CFD: US500) posted rallies upwards of 4.0%.
- U.S. dollar: The USD gained ground versus the majors, highlighted by significant rallies against the euro, British pound and Swiss franc. For the session, the EUR/USD (-157 pips, -1.38%), GBP/USD (-220 pips, -1.68%) and USD/CHF (+148 pips, 1.61%) all trended in favour of the dollar.
Past Performance is not an indicator of future results.
17 March 2020: COVID-19 Fallout
Throughout the month of March, event cancellations became commonplace. To depress the spread of COVID-19, businesses and governments adopted policies designed to promote social distancing. Sporting events and concerts were cancelled or postponed, and employees were encouraged to work from home. Also, the March primary season was partially postponed.
The movement for social distancing greatly impacted the 17 March primary Ohio. In response to the COVID-19 contagion, Ohio Gov. Mike DeWine chose to delay voting until 2 June. DeWine's decision became a trend, as Georgia, Connecticut, Indiana, Ohio, Rhode Island, Louisiana and Kentucky all postponed primary voting until later in the calendar year.
Despite Ohio's delay, the scheduled 17 March primaries were held in Florida, Illinois and Arizona. The outcomes reaffirmed Biden as the probable Democratic nominee. When the votes were tallied, Biden's delegate lead over Sanders was reported as 1,215 to 910. Even though a Democratic hopeful needs a minimum of 1,991 delegates to secure the party nomination, a probability of 88.6% was assigned to Biden eventually reaching this threshold.
The aggregate impact of 17 March primary voting on the markets was likely negligible. Coming off one of the worst one-day pullbacks in U.S. stocks since 1987 (16 March) and a FED reduction of the Federal Funds Target Rate to near 0% (15 March), the world's capital markets were in turmoil. However, once again, primary day proved to be positive for U.S. equities and the USD:
- U.S. Equities Indices: In the same fashion as a week earlier, U.S. stock indices rallied. For the session of 17 March, the DJIA (CFD: US30) and S&P 500 (CFD: US500) gained 2.6% and 3.2%, respectively.
- U.S. Dollar: Despite the emergency FED rate cuts of 15 March, the USD unexpectedly gained market share in the short-term. For the 17 March session, the EUR/USD (-183 pips, -1.64%), GBP/USD (-217 pips, -1.77%), USD/CAD (+185 pips, +1.34%) and USD/CHF (+141 pips, +1.49%) all favoured the Greenback.
Past performance is not an indicator of future results.
The single greatest impact that the U.S. electoral process has on the forex is Election Day. When the polls officially open, market participants watch incoming data for any clue to the electorate's decision. As a result, the hours preceding and following Election Day typically feature enhanced forex volatility.
The 2016 shock victory of Republican candidate Donald Trump is a prime example of the impact that a U.S. presidential election can have on the forex. Upon Trump's win becoming official, the USD experienced heavy turbulence, quickly losing 3.5% against the yen and 2.2% versus the euro. While primaries, conventions and debates may draw participation to the forex, Election Day is the ultimate U.S. political market driver.
This article was last updated on 26th March 2020.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…