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Possible Scenarios of Rupee - US Elections

Possible Scenarios of Rupee - US Elections

  • Date19 Oct 2020
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The key issue on which the 2020 US presidential election would be contested as far as undecided voters are concerned would be the expected policy response to the ongoing health crisis and the proposed measures to revive the economy.  

Biden leads Trump by around 10 percentage points in most opinion polls. Many are expecting Biden to sweep the election, or are seeing a so called 'Blue Wave' across the nation. The betting market is also pointing towards a convincing victory for Biden.

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Given the impasse around the second fiscal stimulus package on account of disagreements between Democrats and Republicans on the scope and scale of the package, the outcome of the election would be viewed through the lens of the fiscal package that would be delivered post the elections. Depending on who wins, the contours of the fiscal stimulus package could be very different. In this context the Senate race becomes extremely important. It promises to be more exciting than the presidential race itself. At the moment, the Senate is controlled by the Republicans while the Democrats constitute a majority in the House. 

33% of the Senate seats are up for election every two years. At present Republicans hold 53 seats while Democrats hold 45 seats (2 seats are currently occupied by independents). If the Democrats manage to take control of the Senate, it would make a more generous stimulus package (which the Democrats are in favour of) easier to pass. 

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We look at the following scenarios: 

Scenario 1: Probability 40% 

A Democrat President + Democrat Senate 

This outcome would be most positive for risk assets. It would result in lower US real rates, Weaker US Dollar, Higher EM equities.  

Scenario 2: Probability 40% 

Democrat President + Republican Senate  

It could entail at least another couple of years of policy paralysis where major bills can be blocked by the Senate. This outcome would be negative for risk and EM assets in general.  

Scenario 3: Probability 10% 

Republican President + Republican Senate 

This would entail continuation of status quo. It would be slightly negative for risk, at the margin. The Dollar is likely to strengthen in this scenario.   

Scenario 4: Probability 10% 

Republican President + Democrat Senate  

This would entail Democrats controlling both houses with Trump as president. This outcome too would be extremely negative for risk as it would be difficult to get any legislation through. The US Dollar is expected to strengthen significantly under this outcome on account of safe haven demand. As far as USDINR is concerned, scenario 1 entails a possibility of a break on the down side. 72.50 is an extremely crucial support and if a break of that level is not followed by a quick reversal, we may see a prolonged trend of Rupee appreciation materialize. Scenario 4, though less likely, would be the Worst Case Scenario for the Rupee and would entail a break on USDINR on the up side. 73.95 is an extremely crucial resistance and break of that could result in a move higher to 75.40. Scenario 2 could also result in Rupee depreciation though the intensity could be a little less. Scenario 3 could see the Rupee continuing to remain range bound (Ceteris Paribus)

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We put together our take on the major domestic and global factors driving risk sentiment over the medium term with special emphasis on political developments, monetary policy outlook and fiscal policy implications.

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