2020 Elections: Trump is showing signs of a comeback, will the dollar follow?

• National polls have been showing that President Trump has narrowed his deficit.
• Surveys in the critical battleground states of Pennsylvania and Florida are also tentatively showing Biden has peaked. 
• The chances of a contested election are rising and could lead to a stock sell-off and a dollar rise.

"It ain't over till the fat lady sings" – goes the adage which is relevant for the 2020 Presidential Elections as well. Two weeks ahead of election day, there are signs that incumbent Donald Trump is clawing back some support, raising the chances that the race could drag on for longer.

Before pointing to the encouraging signs for the president, it is essential to note that Biden's lead remains significant and that there major differences in comparison to 2016. These include the fact fewer undecideds, more high-quality state surveys, and the fact that 38 million Americans have already voted – around six times more than at this point six years ago. Moreover, pollsters may be overcompensating for some of their errors back then. 

See 2020 Elections: Seven reasons why this is not 2016, time to focus on the Senate

All in all, Biden is a clear favorite to win the elections – but the chances that it will be disputed by a disgruntled Trump are now higher. 

Examining several polls

On the national level, the New York Times/Siena College poll showed Biden leading by nine points – the first post-debate high-quality poll to show only a single-digit lead for the former Vice President. Surveys from Fox News, NBC, ABC and others showed a double-digit advantage during October.

Another recent publication worth mentioning is the IBD/TIPP poll that pointed to Trump trailing by only three points. This pollster is releasing daily surveys that have consistently been more favorable to the incumbent.

Back in 2016, it showed the then-businessman leading over Hillary Clinton – was wrong as she won the popular vote by nearly three million people or 2%. 

These polls have pushed the RealClearPolitics average down to 8.6%:

Source: RCP

There has been a marginal movement against Biden also in state polls. The gap in Florida has narrowed to 3% according to FiveThirtyEight. The Sunshine State began early voting on Monday and together with mail-in ballots, votes amount to around 31% of turnout in 2016.

More importantly, counting is underway, and elections are due only a few hours after election day voting ends. That makes Florida central to a quick outcome. 

Source: FiveThirtyEight

If Biden wins Florida, it is hard to see Trump winning. However, if the president clings to his new home state, the focus would shift to Michigan, Wisconsin, and most importantly Pennsylvania. The president's victory in 2016 was based on fewer than 100,000 votes in his favor in these three states. 

The Keystone state is also showing signs that Biden's support has peaked.

Source: FiveThirtyEight

Market implications

Investors have been pricing in a decisive night – a considerable win for Biden and winning over the Senate, thus allowing for a generous stimulus package. That was in October, after Trump's disastrous debate performance and after contracting COVID-19. 

However, back in September, polls were tighter and fears of a contested election were rife. In case the incumbent wins Florida, the battle would go up north. There, election-day voting could initially show Republicans in the lead, before the mail-in ballots are counted. Trump would declare victory and then cry foul as remote voting would show Biden leading. 

Having both candidates declare victory would cause significant political instability and uncertainty – that markets despise. While GOP leaders could eventually push Trump out, long weeks of tension – and perhaps violence on the streets – could weigh on sentiment and boost the safe-haven dollar.

How realistic is a contested election? It is still far, but there are higher chances it happens. 

The next – and last – significant event in the campaign is the final debate between Trump and Biden, due late on Thursday. That is Trump's chance to make a more meaningful recovery. If he pivots to the center and performs well, polls could further tighten. However, his recent speeches on the campaign trail are pointing to focusing on his base. 

More 

• 2020 Elections: How stocks, gold, dollar could move in four scenarios, nightmare one included
• Handicapping the US 2020 Election: Polls, registration and the shy Trump voter