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Closer than predicted US Presidential election leaves markets uncertain

Currency and equity markets remained volatile as the US Presidential race was closer than predicted, leaving the result in doubt for days.

Gaurang Somaiya, Forex and Bullion Analyst, Motilal Oswal Financial Services, said: "After opening lower, the rupee traded in a narrow range against the US dollar, but the volatility within the range remained high. Market participants are cautious as early results suggest that the US Presidential election proved far closer than polls had predicted potentially leaving the outcome in doubt for days or weeks.

"Volatility for the dollar is expected to remain high also as focus will be on the FOMC policy statement that will be released later this week. For the next couple of sessions, we expect the rupee to trade with a negative bias and quote in the range of 74.40 and 75.20."

David A. Meier, Economist, Julius Baer said: "In a tight race, the US Presidential elections are not yet decided. The candidates have won their 'must-have' states and (President Donald) Trump is looking strong in having won toss-up states Florida and Texas. The vote will be decided in the swing states Michigan, Pennsylvania and Wisconsin, where the counting of early voting by mail could still stretch beyond today, opening the door for potential controversies."

"The US elections are turning out to be a very close call. In the presidential race, the candidates look to have won their 'must-have' states so far, (Joe) Biden the Democratic strongholds in the coastal areas and Trump the Republican heartland in the South and Mid-West. As had to be expected, all is boiling down to the swing states. Here Trump looks surprisingly strong, likely having defended Iowa, Ohio, Georgia, North Carolina and also the large states Texas and Florida, so basically all the states where polls had predicted a toss-up," he added.

Biden has now to win the Democratic-leaning swing states, in particular win back the northern "blue wall" states Wisconsin, Michigan and Pennsylvania that President Trump conquered in 2016. Here the preliminary results prefer Trump, but are based on Republican-heavy election day voting and the number of counted votes is still in the range of 60-80 per cent of expected votes, he said.

"President Trump has already jumped onto the occasion in accusing the Democrats of trying to steal the elections. A counting that lasts for days raises the likelihood of disputes, lawsuits and ultimately civil unrest," Meier added.

David Kohl, Chief Economist, Julius Baer said the tight US election outcome and the associated uncertainty provide short-term support for the US dollar.

"Once the election outcome is known, a divided government would support the US economy and weaken the US dollar moderately. A blue wave has the potential to weight stronger on the longer-term US dollar outlook while rising the odds for a swifter recovery," he added.

Kohl said the still pending US election outcome keeps uncertainty high, supporting the US dollar short-term given its safe-haven characteristics. "Looking beyond the short-term uncertainty, a divided government either under President Trump or under President Biden will deliver moderate support for the economy and we expect the US dollar to weaken, reflecting rising risk appetite."

"A united government or a blue wave would boost the support for the economy and at the same, the longer-term headwinds for the US dollar. The expansionary fiscal policy will support the economic recovery and risk appetite, with the latter weighing on the US dollar. The prospect of higher corporate taxes is an additional burden for the longer-term USD outlook," he added.