What if Joe Biden pulls out of the election race?

>> What could squeeze the US dollar much higher?

It is not guaranteed to happen, but before the recent presidential debate between Biden and Trump the betting market put the implied probability of a Biden victory at around 47%. That has slumped to just over 20% which is actually very similar to the implied probability of a presidential victory for Vice President Kamala Harris from the same betting markets! This probability stood at just 3% before the presidential debate. At a minimum it suggests that investors need to be ready should the election take a dramatic twist.

Steve Barrow, Head of Standard Bank G10 Strategy, said that without seeking to downplay the impact of a Biden withdrawal, it is worth noting at the start that markets might be quite guarded in their response for a number of reasons.

For a start, it is not as if opinion polls suggest that Harris or any other Democratic presidential candidate can do better against Trump than Biden come November 5^th. Historians will point out that the last time a vice president took over in this way, in 1968 it did not end well for the Democrats.

Secondly, financial markets seem more wrapped up in the performance of the economy and the outlook for monetary policy than politics. For instance, it is widely thought that a Trump presidency could have significant implications for the economy and monetary policy, but it does not seem that the market wanted to price these in last week in spite of both Biden’s poor debate performance and Trump’s Supreme Court win.

This harks back to remarks we have made before, which are that the vagaries of the US electoral system make it hard to call the outcome of elections even if opinion polls lean in one direction. Trump discovered this in 2016 when he won a shock victory over Hilary Clinton. The market knows this and understandably seems reticent to price too much in ahead of the presidential vote. This seems all the more appropriate this year as there’s still big hurdles for Trump to negotiate, not least the likely criminal trial verdict in September.

It suggests to us that, while a Biden withdrawal would be a seismic shock, the initial response, at least, might be limit ed. And even over time, as the new Democratic candidate sees his or her polling levels fully reflect their entrance into the race, the market might be reticent to react until the election itself. The upshot is that if a Biden withdrawal really does lift the probability of a Democratic victory the market reaction is likely to occur after the election result has been announced, not before.

>> Major currencies could be more volatile around election time

However, that observation might not be a great deal of help to those who have US dollar transactions to undertake that fall due after November 5^th and have to decide today whether to hedge these payments or receivables, or not. For those that have such questions to answer, we believe that US political developments increase the odds that the US dollar will stay relatively becalmed after the election with a modest bias towards weakness. This is based on the assumption that Biden pulls out, that Harris becomes the candidate and defeats Trump on November 5^th.

“Now we accept that these are all difficult calls to make. The first is made on the basis that this trickle of calls from within the Democratic Party is likely to develop into a flood. We’ve seen this happen in other countries, particularly the UK, where murmurings of dissatisfaction with leaders usually rise to a crescendo rather than drift away. We suspect that Harris would take over the candidacy in this case because she would inherit Biden’s campaign funds and the Democrats would desperately need to avoid a nasty fight for the nomination at the convention, as this is arguably what did for the Democrats back in 1968 when Lyndon Johnson stepped aside,” said Steve Barrow.

Our third conclusion, that a different candidate could defeat Trump is based partly on the fact that the current contest seems to be a race between two relatively unpopular candidates that have low approval ratings. If Harris, or another candidate shows an ability to rise above this quagmire then their chances of a November 5^th win might be greater than those of Biden right now.