Friday, October 23, 2020

Short-term volatility may help boost the dollar, gains should be limited by the weak outlook for the greenback in the longer-term

  • Dollar
  • DXY
  • Elections


Analysts’ Pick: Short-term volatility may help boost the dollar, gains should be limited by the weak outlook for the greenback in the longer-term

  • Trump may have regained some of his following from his better performance at the final presidential debate, but minimal mistakes from Biden suggests that Biden is more likely to retain most of his lead
  • Trump is mostly not favoured to win, but he still has a chance. However, in our view, he needs to win electoral votes at Georgia, Texas and Ohio to even have a chance. Even then he will still need to win two out of three key swing states (Pennsylvania, Florida, Michigan)
  • Volatility in this period is expected, which may boost the dollar in our view. But short-term upside is likely to be limited as we expect the dollar to continue to weaken on the basis of a post-election stimulus package and increased chances for a Democratic sweep

 With the conclusion of the final US presidential debate, we enter into the final week of the presidential campaign. While US President Donald Trump remained mostly calm through the debate - a stark contrast to what we saw in the first debate - minimal mistakes from Joe Biden suggests that it was unlikely that Trump gained much ground through today's event. Here are our highlights of today's debate:

  • We view Trump's calmer demeanour to be a plus that may be enough to regain the trust of small portion of followers he lost after the first debate
  • Biden's slip up in regards to fracking, a key factor for states where fracking consists of thousands of jobs (Pennsylvania), may help Trump to gain at least some traction in those crucial battlegrounds
  • Trump returned to his strategy in 2016, to paint himself as less of a career politician, in contrast to that of Joe Biden
  • Trump's answers in regards to asylum-seeking immigrants, his tax statements and his bank account in China in our view was weak and is regarded as a negative from our perspective
  • Biden minimal mistakes means that it is unlikely to have disappointed anyone, implicitly suggesting that his lead is likely to mostly stay even if he fails to gain new supporters

Consequently, more likely was that Trump managed to regain the trust in some of those that doubted him earlier, which we view to be a small following. He may also have gained some traction in Pennsylvania, a state where thousands are employed by fracking companies, after harping on Biden's implicit stance that he sees the eventual closure of that sector and Biden's eventual confirmation that he supports the eventual unwinding of the oil industry in favour of clean energy. Finally, with more than 47 million Americans already casting their votes, it does suggest that many voters have already made up their minds by now.

Polls continue to favour a Biden victory, in both the betting markets and electoral college vote forecasts based on state polls. The most important states to watch will be Pennsylvania (20 votes), Michigan (16 votes) and Florida (29 votes), all of which are states currently favouring Biden that voted for Trump in 2016. Currently Trump electoral votes stands at an estimated 125 on RealClearPolitics. If we include all swing states that currently favour Trump and voted for him in 2016 (Georgia, Texas, Ohio), that number goes up to 197 vs Biden at 232. If we include Wisconsin (a toss-up state that is currently leaning towards Biden in polls but voted for Trump in 2016), then Trump will be at 207. He would still need to win at least two of three votes in Pennsylvania, Michigan and Florida to have a chance at winning the election.

Trump may be closer to a win than anticipated if we assume TX, GA and OH to vote for him, but he’ll have most likely need to win Pennsylvania and Florida to make a difference


Also, to note is Biden's more decisive lead in overall polls as opposed to 2016 presidential candidate Hilary Clinton back in 2016. That said, his lead in top battlegrounds only appears to be marginally better than Clinton, but with more consistency over time. This suggests that a Biden victory is likely, but the presidency race may be closer than what the market expects.

Spreads between Biden and Clinton’s lead over Trump in electoral votes suggests that Biden’s lead isn’t stronger in swings states despite being more consistent



In addition, recent stimulus has not shown much robustness in terms of a bill - or even an agreement - before the November elections. Progress has been made, but several key issues such as state and government aid, and support for businesses are issues that still need to be agreed upon first. Furthermore, Republicans in the Senate have been relatively vocal on their lack of support for the White House's fiscal stimulus proposal of US$1.8 trillion, and is much less likely to support one that is more than that. This mostly means that a stimulus package is unlikely to be passed before the November elections. But we do still expect fiscal measure post-elections after politics takes a step back. Finally, the prospects of a Democrat controlled Senate is also looking increasingly likely which negates the party’s propensity in compromising on details of their US$2.2 trillion stimulus proposal.


This is likely to result in volatility in the short-term as we move into the final week before election day. The dollar in our view may show some strength in the short-term, and we may see the Dollar Index rise back closer towards 93.39’s level. However, our longer-term forecast for the dollar remains more tilted towards the downside, and as a result is likely to cap gains in the dollar over the next week. Losses are even more expected as we factor in the increased likelihood of a Democratic sweep, since this will open up the doors to heavy fiscal spending from Democrats. As a result, our baseline scenario sees the dollar retesting the support at 91.73’s level. That said, a Democrat presidency and a Republican controlled Senate in our view is more likely to be worse than a Trump presidency with a Democrat-controlled Senate in terms of an economic outlook, due to an expected gridlock in Washington on spending. This is one of key risks that we are watching closely, that could result in a strong-than-expected dollar in the medium-term.

Technical Analysis:


The dollar Index remains in a downtrend although it appears to be finding some strength after reaching into the oversold region in the RSI. In the short-term, there seems to be some indications from MACD of a weak rebound in the dollar, which could be suggestive of a small uptick before we see the greenback return into its longer-term downcycle. This weakness can be also seen in the overall trend over 6-month trend for the dollar, in addition to the combination in both the MACD and RSI. Hence, we view the current  upper limit for DXY to be at 93.39’s level, before we see another dip back down over the medium-term to retest the 91.73 support level.

Support: 92.53 / 92.17 / 91.73

Resistance: 93.39 / 93.88 / 94.71

DXY Chart (H4)