Equity markets demonstrate buoyant behavior on Tuesday, anticipating a positive elections outcome. Vigorous upside on Monday followed by more cautious buying interest today. Futures on US indices trade in positive territory, Europe is also green, apparently pricing in coming support measures from member states (as lockdowns have been priced in), greenback plays defense. Oil rose amid solid signals that oil-producing countries are inclined to float supply-adjustment measures. There are all the signs of risk-on expectations of Biden's victory.

Let's consider the main outcomes of elections and possible reactions of the FX market to them:

Full control of the Democrats (aka Democratic Sweep)

This is the most positive outcome for the markets as the likelihood of Democratic approval of a large fiscal stimulus package and a return to multilateral diplomacy will skyrocket. Long-term bond rates will rise on expectations of higher inflation in the future. The greatest positive effect in this outcome will be experienced by currencies that depend on the business cycle and the cycle in the commodity markets - NOK, AUD, CAD, NZD. In the medium term, they have a chance to rise well against USD and JPY, which will be under increased pressure.

Biden wins, Republicans retain control of the Senate.

With this outcome, US foreign policy becomes less unpredictable, and the likelihood of active confrontation in trade and sanctions pressure on China decreases. However, the odds of a major fiscal deal will be lower than with full Democratic control, which will hit market sentiment. In general, the trends will be similar to those under the outcome of full Democratic control, but less pronounced. The pressure on the dollar will grow, but to a lesser extent.

Trump wins

Trump's victory will come as a surprise to the markets. With such an outcome, the chances of a further decline in the dollar will sharply decrease and it will make sense to expect USD reflation as well as positive performance of CHF, JPY and other safe heavens.

Contested elections

This is the most negative outcome for the stock market, in which a deeper correction is likely. For SPX, this is the key level of 3000 points. Safe havens in the foreign exchange market such as JPY, CHF and USD will show strong performance in pairs with currencies dependent on the business cycle (see above).