US election monitor: Democrats are slight favourites to secure the Senate
|In this edition of the 2020 election monitor, we take a closer look at the often overlooked Senate election race. The passing of Supreme Court Justice Ruth Bader Ginsburg last Friday is an opportunity for a 6-3 conservative majority in the US Supreme Court. A similar situation unfolded under Obama in 2016 with nine months remaining until the election, where the Republican majority Judiciary Committee refused to conduct the necessary hearings. However, Trump seems to have found the necessary support in the Senate and will announce the candidates by Friday or Saturday.
The presidential election is increasingly decisive for the election for the Senate. Chart 2 illustrates the trend that US Senate seats are increasingly going the same way as the presidential election. The tendency is especially strong in years with presidential elections, with all Senate seats going to the party of the wining presidential candidate in 2016.
Currently, the Senate election looks very close with prediction markets tilting towards a Democratic victory 56% (up 3pp since last week). Democrats need to win five of the seven toss up states to win. Democrats are currently leading four of the seven toss up states by at least 4pp (North Carolina, Michigan and Maine, Arizona). The state to watch will be Iowa where Democrats currently have a slim 0.4pp lead against incumbent Joni Ernst, who has vocally supported a Trump selected Supreme Court Judge.
Focus for FX markets will be if the winner has Congress, or not as there is very limited evidence that uncertainty about the winner by itself (e.g. if votes initially are nearly 50/50) will move markets. Both presidents are expected to pursue an expansive fiscal policy with a win in the Congress and our assumption is the Fed would welcome such, thus adding to EUR upside. The tail risk for a stronger USD is either Trump pursuing tariffs, whereas Biden could potentially choose to pursue heavy tech regulation. A more realistic downside scenario for EUR/USD from the election would be a continued stalemate in US politics. This would be negative by adding to consolidation in global markets, as we have seen over recent weeks.
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