@

Trading The U.S. Election

Political uncertainty is a key forex market driver, stimulating participation, order flow and volatility. Whether it's a forced regime change or democratic election, politics can quickly sway currency valuations around the globe. Accordingly, one of the most important forex market fundamentals is a U.S. General Election.

Held on Tuesday, 3 November 2020, the U.S. General Election will decide the American government's makeup for years to come. Seats in the Senate and House of Representatives, as well as the next President of the United States (POTUS), will all be chosen as directed by the U.S. Constitution. For currency traders active during this period, it's important to be aware of critical events before, during and after Election Day.

What Makes The 2020 Election So Unique?

While every election is different, the 2020 Election is truly unique. The onset of the coronavirus (COVID-19) pandemic forced several changes to the traditional electoral process. Below is a look at the differences:

  • Convention Cancellations: Both the Republican and Democratic conventions were cancelled due to public health concerns. Instead, the planned gatherings were held virtually or in a vastly reduced capacity.
  • Limited Campaigning: Campaign rallies were limited in size and number, reducing each candidate's public engagement.
  • Mail-In Voting: For Election 2020, a vast majority of the voting will be conducted via mail. Historically, "absentee ballots" have been a mail-in form of voting used by people not able to vote in person. Due to COVID-19 precautions, mail-in voting has been implemented on a large scale in a majority of states.[1]

Ultimately, a large portion of the 2020 U.S. General Election will be conducted via mail-in balloting due to COVID-19 considerations. This has proven to be a point of contention among presidential candidates:

  • Incumbent Donald Trump (R): "Republicans should fight very hard when it comes to statewide mail-in voting. Democrats are clamoring for it. Tremendous potential for voter fraud, and for whatever reason, doesn't work out well for Republicans."[2]
  • Democratic Nominee Joe Biden: "Voting by mail is safe and secure. And don't take my word for it: Take it from the President, who just requested his mail-in ballot for the Florida primary on Tuesday."[3]

The race for the White House between Trump and Biden was a heated one. And the introduction of mass vote-by-mail programs in response to COVID-19 added fuel to the fire. In addition, the plan introduced several unprecedented outcomes, including vote count delays and a potentially contested election.

The Run-Up To Election Day

2020 was a monumental year on the forex. Issues such as COVID-19, Brexit and a hot U.S./China trade war brought enhanced volatility and extensive market tumult. No currency was spared, as the U.S. dollar (USD), British pound sterling (GBP), euro (EUR) and Swiss franc all experienced severe pricing fluctuations.

During the run-up to Election Day 2020, the USD struggled to regain marketshare vs the majors. The USD Index closed September at 93.80, down 8.9% from March's high of 102.99.[4] While the lagging performance came largely as a result of a sudden economic downturn and dovish monetary policy from the U.S. Federal Reserve (Fed), political uncertainty contributed to forex angst.

For traders engaging USD-based pairs (majors, exotics) in the days ahead of the election, it is critical to remain cognisant of sudden spikes in volatility. The following events are potential pre-election market drivers:

  • Scheduled Engagements: Official debates, press conferences and campaign events are all capable of impacting USD and forex valuations.
  • Geopolitical News: The announcement of trade deals, adjustments to foreign policy or armed conflict are all potential market drivers.
  • Polling Data: Although far from an exact science, polls are a key barometer measuring each candidate's chance at winning the election. Should there be a sudden and significant move in the polls, traders and investors are likely to price the development accordingly.

In the financial markets, perception often becomes reality. Debate surprises, breaking geopolitical news and polling data can all skew the market's view of who will be victorious. The result may be dramatic shifts in USD valuations due to preemptive, speculative buying and selling.

Election Day Trading

Historically, trading futures, forex or equities on a U.S. Election Day can be a dicey proposition. The rapidly-evolving news cycle often produces whipsaw conditions and non-committal action. Although it is possible to potentially profit given an appropriate strategy, market conditions aren't always conducive to positive expectation trade setups.

For anyone interested in actively trading on Election Day, it's important to remember that markets aren't fond of uncertainty. Uncertainty can quickly drive participation to or from the markets, and this can create choppy order flow and turbulent price action. The following periods on Election Day are all capable of sending asset values directional very quickly.

Wall Street Open

The Wall Street equities market's opening (9:30 a.m. EST) can bring a flurry of action to stocks, commodities and currencies.

Exit Poll Results

Media exit polls are capable of bringing major volatility to the markets. In 2019's December U.K. election, the pound sterling (GBP) jumped by more than two cents against the USD upon release of exit polling data.[5] Traditionally, U.S. exiting polling data is released by media outlets during the afternoon of Election Day. However, due to vote-by-mail functionality, the scheduling of such items are ambiguous.

Wall Street Close

The Wall Street equities' close at 4:00 p.m. EST is likely to signal market sentiment regarding the election's outcome. A large move one way or the other may shed some light on the market's expected result.

State-By-State Poll Closures

Upon the polls closing in a state, official precinct results begin their reporting. As the election's victor becomes clear, forex volatility may spike as traders and investors price the final vote tally.

Election Day 2020 will be an outlier when it comes to actually counting ballots. Mail-in voting is largely a district-by-district decision. Some regions are exclusively vote-by-mail and others are subject to conventional, in-person voting. Nonetheless, the release of exit polling data and the state-by-state poll closures can instantly boost forex volatility.

The 2016 election provides an instructive example of Election Day volatility facing the USD. Going into the contest, the prospect of a Donald Trump victory negatively impacted the Mexican peso (MXN). Promises of new U.S./Mexico trade policies prompted traders to consider a Trump win as being bad for the MXN. On Election Day, the MXN rallied by 1% vs the USD as currency traders viewed Hillary Clinton as the likely winner.[6]

Post-Election Trading

Once an official outcome is determined, turbulent price action is likely to sweep the forex as traders value the election's implications. Participation and traded volumes will be high across the majors, enhancing pricing volatility facing USD-based currency pairs.

For those trading the forex during the election's immediate aftermath, two steps can help manage the hyperactive market conditions:

  • Aggressively Manage Leverage: For active forex traders, leverage is the quintessential "double-edged sword." During periods of extreme volatility, reducing applied leverage can help manage chaotic swings in forex pricing.
  • Use Stop Losses: It never hurts to use a stop loss for open positions. If a surprise event sends the market significantly higher or lower, a stop loss ensures that catastrophe is avoided.

Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

For the 2020 Election, it remains to be seen how or when a final decision will be rendered. As of this writing (early October 2020), the timetable for counting mail-in ballots is unknown. However, the COVID-19 precautions have added steps to the balloting process, making it more involved than in a conventional election.

Summary

Even in a traditional year, trading the U.S. General Election can be a challenge. Countless factors can rapidly sway the forex before, during and after the result becomes final. However, COVID-19 has altered the electoral process for 2020 and could potentially alter the election's timeline significantly.

In order to successfully trade the forex during the U.S. election, it's critical to stay abreast of breaking news items and aggressively manage risk. By doing so, one is able to preserve risk capital during periods of extreme volatility while pursuing gains in the marketplace.

Disclosure

Risk Warning: Our service includes products that are traded on margin and carry a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.