Scenarios for 2021 inauguration, is there danger for the dollar?

This article was submitted by Michael Stark, market analyst at Exness.

On 20 January 2021, Joe Biden will be sworn in as president of the United States of America and take Donald Trump’s place. Democracy in the USA faces a vulnerable moment every eight, or four years in the case of one-timers, and is dependent on the orderly transition of power from one president to the next.

Donald Trump has complained on Twitter for weeks now about election fraud. He attached the validity of postal votes and challenged the results in few key states. Most importantly however, he hasn’t actually done anything to back up his online rants except make some half-hearted attempts at lawsuits.

Exness Education explores a few options of what could happen over the next few months before the inauguration. The Exness team certainly doesn’t believe this will result in a national crisis as the Secret Service and FBI drag Trump kicking and screaming out of the White House, however a lot could actually happen. The current administration hasn’t cooperated with the Mr Biden’s transition team and that could be a key factor for many financial markets in the coming weeks.

There are three main scenarios that could be identified:

  1. The base case – somewhat disrupted and disorderly transition
  2. Unlikely but possible – orderly, smooth transition as seen in 2008 and 2016
  3. Nearly impossible – Donald Trump refuses to leave office

How the choice of president affects the markets

Usually, the financial markets prefer a Republican president. Typically (but not always), Republicans put economic growth that favours Wall Street first rather than Main Street. Issues such as social security, health, education, international relations, civil rights and various other are usually considered as secondary at best. This can be observed to some extent in what happened immediately after 2016’s election:

The dollar made very strong movements upwards against the yen and most other currencies from early November 2016 to President Trump’s inauguration. Participants in American markets expected prosperity for equity markets: deregulation, tax cuts, pressure for easy monetary policy and all the other hallmarks of a Republican in charge.

In most aspects Donald Trump is a ‘turbo Republican’. American stock indices have reached new heights during his presidency, job data and other economic indicators that wouldn’t usually receive specific comment from a sitting president. On the other hand, he also started trade wars with China and other countries which has been disruptive to business.

At the same time, the government’s response to the covid-19 pandemic has been bafflingly inadequate with the strategy moving from hoping it would go away in the beginning to trying to ignore it whenever possible and talking about anything else in the runup to the election.

Covid is also the main factor behind the current uncertainty the financial markets face. No one knows when a vaccine will be available for the public and no one can predict how governments will tighten the measures like lockdowns.  A Biden administration will certainly adopt more federal measures against covid, but it’s unclear how quickly it might be able to implement them if the current government refuses as expected to cooperate.

The base case: disorderly transition

Some participants in financial markets had hoped that the base case for the presidential election of a clear win by Joe Biden might be realised. If Biden had won a landslide, Trump wouldn’t have much of legal options. So far, almost all of the lawsuits challenging results of the election have been dropped or dismissed. However, the relatively narrow margin of victory for Biden gives Trump somewhat opportunities to dig his heels in and question the legitimacy of results in some states.

Scenarios for 2021 inauguration, is there danger for the dollar?

Markets generally seem to realise there is high likelihood of a disrupted and chaotic transition. More than a week after the result was beyond doubt, Trump has still refused to concede. Lack of commitment in some financial markets is one of the results:

During a deadly global pandemic that has brought record low interest rates, unlimited quantitative easing, mass unemployment in many countries and one of the worst recessions on record.

Legal challenges and recounts are not likely to make a difference to the results of the presidential election. However, lack of cooperation by the outgoing government with Biden’s incoming administration has markets somewhat nervous.

Unlikely but possible: smooth transition

In an interview with the Atlantic released in mid-November, former president Barack Obama discussed Donald Trump and the transition, criticising the ‘petulant’ president. However, admitted that George W Bush and his administration ‘could not have been more gracious and intentional about ensuring a smooth handoff’ in 2008. However, few expect a smooth handoff this time.

On 14th November, USA registered record 166,000 new cases of covid-19, the 12th day in a row with over 100,000 new cases. If the current administration shared information on new cases and their patterns with the new administration of the Democrats, implemented social lockdowns, enforced mask-wearing from the federal level or at least put pressure on states’ legislatures to enforce it.

In the unlikely scenario that this happened, markets would be likely to return fairly quickly to something resembling normal. The handling of covid while a vaccine is fully tested and brought to market would improve the outlook for recovery dramatically, boosting shares and oil.

However, in this case, the expected expansion of fiscal aid would probably be negative for the dollar, while gold’s performance would depend to a great extent on sentiment in markets overall.

Nearly impossible: national crisis

In a scenario where Trump has exhausted all legal options this time next month, which is very likely, but still refuses to concede and leave office, then on 20 January, Secret Services would have to trat him as trespasser and remove him from the White House, if necessary by physically dragging him out.

This option would be particularly bitter for the USA’s reputation around the world, arguably a more important factor would be rampant covid-19 in the interim. The failure of any coherent transition in such a scenario would mean that the Democrats couldn’t start serious planning for containing the virus until 20 January.

A full two months of Republicans ignoring the covid crisis and basically everything except the results of the election would be catastrophic. If Trump refused to leave office it could crush any chances of economic recovery in the USA in the first quarter of next year. Gold would have perhaps the most to gain:

Gold broke above the crucial psychological resistance of $2,000 in the beginning of August and held there for a full five days, making three new all-time highs.

No guarantee of a weak dollar

The current ‘base case’ of a somewhat but not enormously disorganised transition from Trump to Biden is not certain, much like anything else in trading. Despite December usually being one of the less active months in financial markets, this year is likely to differ.

The unsettled political climate in the US, the spread of covid-19 virus and its effects on sentiment in stock markets mean that opportunities for daytraders in both directions are likely to continue for many symbols pretty much up to Christmas. The new year 2021 will also probably bring new volatility and uncertainty.

The information on this page does not constitute, and should not be construed as investment advice or recommendation or solicitation to engage in any investment activity. Investors’ objectives, particular needs, and financial situation have not been taken into consideration. Any information regarding hypothetical or simulated performance is not a reliable indicator of future performance and should not be relied upon as a basis for investment decisions. No investment strategy is without risk. Trading is risky. Excess volatility increases risks further. Be cautious.

Read Also: