Trading The 2020 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. 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.

The Contested Election Of 2020

The onset of the 2020 coronavirus (COVID-19) pandemic brought the U.S. general election's voting mechanism into question. Potential health hazards stemming from Election Day public gatherings prompted many states to institute an exclusive mail-in format. Subsequently, a total of 46 states offered some form of mail-in voting to all voters.^[7] In light of these newly adopted measures, Election 2020's result was heavily scrutinised before ever being rendered.

During the run-up to Election Day, both incumbent POTUS Donald Trump and Democratic challenger Joe Biden filed lawsuits regarding election integrity in key battleground states. The volume of such litigation was immense, with hundreds of lawsuits remaining active in the week leading up to 3 November 2020. A bulk of these efforts were focussed in Arizona, Michigan, Nevada, Ohio, North Carolina, Pennsylvania and Wisconsin.^[8] While not unexpected, the lawsuits suggested that Election 2020 was highly likely to be contested.

Financial Markets And Forex React

On Election Day, the financial markets largely ignored the implications of a challenged outcome. For the 3 November 2020 session, risk assets posted bullish rallies as the Dow Jones Industrial Average (+2.0%), S&P 500 (+1.8%) and NASDAQ Composite (+1.8%) all closed significantly higher.^[9]

The USD wasn't as fortunate, with exchange rates slumping on 3 November versus the majors. Intraday uptrends in the EUR/USD (+0.60%), GBP/USD (+1.03%) and NZD/USD (+0.59%) highlighted the greenback's weakness.

Note: Past performance is not an indicator of future results.

Upon the polls closing on 3 November, the physical counting of outstanding ballots took considerable time. This was due to several factors, including extended voting deadlines and an unprecedented volume of ballots. In the aggregate, 2020 voter turnout was an all-time record as more than 150 million ballots were cast.^[10]

Election Results Contested

On 7 November 2020, after five days of vote counting, Democratic challenger Joe Biden was declared by media outlets as the new president-elect. Despite the declaration, Trump supporters and campaign affiliates launched legal efforts on a multitude of fronts.

Over the next month, more than 50 lawsuits were filed to contest the results of Election 2020. A majority of these motions were put forth in battleground states with close margins. Among the most heavily litigated were cases in Georgia, Pennsylvania, Arizona, Wisconsin and Michigan.^[11] In addition to the lawsuits, official recounts were conducted in Georgia, Arizona and Wisconsin^[12]; none produced a substantial change to the vote count.

Perhaps the most notable legal challenge to Election 2020 came from the state of Texas on Monday, 7 December. Texas representatives filed a grievance with the United States Supreme Court (SCOTUS) claiming that widespread election fraud had disenfranchised local voters. The lawsuit was denied by the SCOTUS on Friday, 11 December, citing that the lawsuit "lacked standing."^[13]

The Markets React

Throughout the roughly six-weeks of legal challenges, equities moved higher while the USD fell significantly. In addition, volatility remained relatively low as various legal challenges were filed, dismissed and withdrawn. From Wednesday, 4 November 2020, to Friday, 11 December 2020, the markets moved directionally in an orderly fashion:

• EUR/USD: The EUR/USD rallied by 398 pips, a gain of 3.4%.
• GBP/USD: Forex traders bid the GBP/USD higher by 168 pips (+1.3%).
• USD/CHF: The USD/CHF fell as traders favored the Swiss franc, sending rates lower by 226 pips (-2.3%).
• U.S. Equities: U.S equities posted strong gains as the election's outcome was challenged. The DOW 30 (+6.3%), SPX (+7.5%)^[14] and NASDAQ 100 (+9.7%) repeatedly made new all-time highs.

Note: Past performance is not an indicator of future results.

Electoral College Casts Votes For Biden

On Monday, 14 December 2020, the U.S. Electoral College cast their votes for Democrat Joe Biden. The final tally was 306 for Biden to 232 for Trump; Biden's count was enough to eclipse the 270 majority needed to win the White House.^[15] For the 2020 election, the Electoral College vote was scheduled for certification on Wednesday, 6 January 2021.^[16]

Forex Markets Activity

Traditionally, a U.S. presidential election cycle ends with one candidate conceding to the other. 2020 was unique in this regard, as no concession was given ahead of the Electoral College casting its votes. As a result, financial market participants looked on with interest during the 14 December trading session:

• U.S. Equities: The American equities markets experienced whipsaw conditions, as evidenced by a reversal and negative close in the DOW 30 (-0.39%).
• EUR/USD: The EUR/USD rallied by 33 pips (+0.28%) amid modest participation.
• GBP/USD: Traders favored the pound over the dollar, driving the GBP/USD 104 pips (+0.79%) higher.
• USD/CHF: The USD/CHF extended its intermediate-term downtrend by losing 30 pips on the day (-0.35%).

Note: Past performance is not an indicator of future results.

Upon being declared victorious in the Electoral College, Biden announced the result via Twitter:^[17]

"Today, the members of the Electoral College cast their votes for president and vice president. And once again, the rule of law, our Constitution, and the will of the people have prevailed."

Congress Certifies Electoral College Vote

The Constitution of the United States outlines the procedure by which American presidents are selected. As dictated by the Constitution, the Electoral College is the official body that votes on behalf of the nation's populace. Several weeks after the Electoral College cast their ballots, Congress counts and certifies the vote. For the Presidential Election of 2020, the Electoral College voted on 14 December, with the final tally being certified on 6 January 2021.

Traditionally, the Electoral College vote and certification thereof is a procedural event. However, 2020 proved unique as incumbent POTUS Donald Trump and Republican counterparts challenged the election's outcome. As a result, an elevated degree of political uncertainty plagued the financial markets from Election Day on 3 November 2020 until the 6 January 2021 certification.

Political Uncertainty Grows

Election 2020 proved controversial as the coronavirus (COVID-19) pandemic fundamentally changed the voting process. To combat the contagion, a majority of states chose to adopt widespread mail-in balloting. The result of these efforts was a record voter turnout of 159,633,396, representing more than 66.7% of eligible voters.^[18]

Democratic candidate Joe Biden finished the race with a 306-232 Electoral College edge over incumbent Republican Donald Trump.^[19] The total was more than enough to secure a 270 majority. On 14 December 2020, chosen electors cast their votes as directed by the U.S. Constitution.

The trading week of 4-8 January 2021 featured the highest degree of American political uncertainty since Election Day. Tuesday, 5 January featured a hotly-contested pair of Senate run-off elections in the state of Georgia; Wednesday, 6 January brought Congressional certification of the Electoral College.

In anticipation of these two events, investors fled risk assets during the Monday, 4 January session:

• U.S. stock indices posted the largest single-day losses in more than a month. For the day, the DOW 30 (-1.21%), S&P 500 (-1.39%) and NASDAQ (-1.54%) all fell more than 1.2%.
• Given the uncertainty, the USD held relatively firm versus the majors. Noteworthy moves occurred in the USD/CHF (-0.50%), GBP/USD (-0.67%), EUR/USD (+0.23%) and the XAU/USD (+2.34%).

Past performance is not indicative of future results.

Congress Certifies Electoral College Vote

In response to Election 2020's final tally, thousands of citizens congregated for what was initially a protest in Washington D.C. on 6 January 2021. The result was an attempted coup and the first breach of the U.S. Capitol in more than 200 years.^[20]

Upon the Capitol being threatened, the joint-session of Congress was immediately adjourned, delaying certification of the Electoral College vote. However, the procedure commenced later in the evening on 6 January and was completed during the early-morning hours of 7 January.

Aside from Inauguration Day, the Electoral College being certified by Congress is the final step in the U.S. election process. The markets breathed a collective sigh of relief during the 7 January 2021 session, sending risk assets and the USD higher:

• American stock indices posted dramatic gains as investors bid equities with conviction. Subsequently, the DOW 30 (+0.49%), S&P 500 (+1.23%), and NASDAQ 100 (+2.12%) closed the day deep into the green.
• In addition to strength in stocks, the USD gained marketshare on the forex. Considerable daily moves came in the EUR/USD (-0.44%), GBP/USD (-0.33%), USD/CHF (+0.69%) and XAU/USD (-0.29%).

Past performance is not indicative of future results.

As a general rule, financial markets are not receptive to uncertainty. Sudden volatilities often stem from inconsistent order flow and market depth, thus undermining the process of price discovery. Conversely, reduced uncertainty can prompt positive sentiment and send markets higher. Although Election 2020 was a contentious period in American politics, its conclusion acted as a catalyst for bullish participation in U.S. equities and the USD.

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.

This article was last updated on 21sh January 2021.