November’s US Presidential Election is expected to be the major event risk in the currency markets between now and the end of the year.

Unlike in 2016, this year’s election has so far gone slightly under the radar in the global news spheres, as nations worldwide are ravaged by the COVID-19 pandemic. Much like he did prior to the last election, Donald Trump has been lagging behind in the latest opinion polls, albeit the deficit this time around is considerably larger than it was four years ago. Democrat Joe Biden now holds around a 10 point advantage over Trump in the latest poll of polls (52% to 42%), a lead that was as small as 3 points during the beginning of the pandemic in April (Figure 1).

Figure 1: US 2020 Presidential Election Poll of Polls (March ‘20 - October ‘20)

Source: Refinitiv Datastream Date: 13/10/2020

FiveThirtyEight, a US opinion poll website that generates probabilities on the outcome of the election based on simulated voting, now shows an implied 86% chance of victory for Joe Biden. Based on bookmakers odds, the implied probability of a Democrat victory is somewhat less, although at approximately 70% still gives Biden the clear edge, as does a similar measure from political prediction website PredictIt (Figure 2).

Figure 2: Implied Probability of US Election Victory (PredictIt) (April ‘20 - Oct ‘20)

Source: PredictIt/Bloomberg Date: 13/10/2020

Leading up to the first televised debate on 29th September, there was a general expectation that Trump would use the opportunity to close the gap in the polls - as has often been the case during first presidential debates in the past. Instead, the debate turned into a rather unseemly insult match marred by constant interruptions and name-calling, in which sentiment for President Trump declined significantly. The situation has been complicated further by the news of President Trump’s positive COVID test on 1st October, and ensuing hospitalisation. While he appears to be on the path to making a full recovery, his prior carelessness and subsequent lack of campaigning appears to have dented his chances of re-election. Betting markets have reacted to the news by narrowing the odds of a Biden win.

While Trump continues to trail in the polls, it’s worth remembering that the opinion surveys conducted prior to the 2016 election also had him well behind in the months leading up to the vote. Even if Biden were to win the popular vote, his victory is also not guaranteed, given how the US Electoral College system works. Hillary Clinton was the fifth such nominee to win the popular vote only to lose the election four years ago, albeit only the second since 1888.

What is the Electoral College voting system?

The President of the United States is not directly voted for by popular ballot and is instead elected via the “Electoral College” system, where 538 formal electors cast an electoral vote.

Each state in the US is assigned a different number of electors, of which is based on the population within the state. The most populous state, California, therefore has the most electoral seats (55), and no state has fewer than 3. The presidential candidate with the highest percentage of votes in each state will receive all of the seats, with the winning candidate needing to obtain at least 270 votes in order to be elected. An issue with the system is that non-US citizens who are ineligible to vote are taken into account when apportioning delegates. While the system has favoured Democratic strongholds such as California and New York in the past, the overweighting of small rural states and more evenly distributed immigration has mitigated this.

Americans will also be voting on the composition of the US Congress next month. All 435 seats in the United States House of Representatives will be contested, as will 35 out of the 100 seats in the Senate. While the Democrats look highly likely to retain control of the House, the currently Republican controlled Senate appears up for grabs.

Which are this year’s key swing states?

The key battlegrounds in the election, where the campaign will ultimately be won or lost, will be the swing states. These states tend to hold disproportionate sway in the result relative to both the Democratic strongholds (generally the more densely populated east and west coast states) and the staunch Republican territories (largely the more rural south and central states).

Based on the latest opinion polls, and the number of electoral votes available in each state, the crucial swing states this year are likely to be Florida (29 votes), Ohio (18), North Carolina (15) and Arizona (11). Pennsylvania (20), Michigan (16) and Wisconsin (10) will also be closely watched on election night, although Biden appears to have opened up a fairly comfortable advantage in these three states if the latest surveys are to be believed.

Figure 3: US 2020 Presidential Election Voting Map*

Source: Ebury Date: 13/10/2020

*based on PredictIt.org

The impact of the COVID pandemic could be a key determinant in these swing states. States such as Florida (34 cases per 1,000 people vs. a 24 national average) and Arizona (31 cases per 1,000) have been particularly badly affected by the pandemic (Figure 4). Trump’s overall handling of the virus has also been widely criticised, which could favour Biden. The US currently accounts for around 20% of all global COVID deaths, despite only accounting for approximately 4% of the world’s population. The relative lack of job protection policies has also triggered a much sharper increase in unemployment in the US relative to most of the developed world, which again may hurt the incumbent president. The initial response of sharply increasing unemployment payments did alleviate the economic crisis, and further aid may be forthcoming before the election, but it seems the public is crediting bipartisan efforts more than the president for these successes.

Figure 4: New COVID-19 Cases per 1M people [Key US Swing States] (March ‘19 - Oct ‘20)