We are less than a fortnight away from the culmination of arguably the most divisive US presidential campaign in history and currency markets are currently preparing themselves for another political spasm.
Needless to say, in the same way that sterling was used as a pressure point in the run up to the EU referendum and during its aftermath, we cannot look at the election without viewing it through the prism of the reaction in the US dollar.
As much as the possibility of a Brexit vote was inappropriately priced into markets – anyone sat watching the screens in the early hours of 24 June will testify to this – there is even less probability of a Trump win being priced into markets.
To say that the Brexit vote caused a market spasm is to say that a Republican victory on 8 November could create something truly spectacular.
As it stands at the moment Clinton is currently in the driving seat with an overwhelming majority of polls and a Democrat win is very much priced into markets. This is uniform between the spot markets that are quoted as instant barometers of sentiment, but also in options markets and other indicators of hedging intent, so far suggesting that the costs of protecting against an ‘adverse’ result have not meaningfully increased as we bear down on voting day.
On the basis of a Clinton win we anticipate a slightly lower run for the dollar, the Japanese yen and the euro as investors bid up emerging market risk on lower risk aversion sentiment.
Sterling would likely benefit against the US dollar, but the focus and glare of Brexit will inevitably return. Across wider markets we anticipate shares to rise globally in a brief and uninspiring relief rally.
When the proverbial hits the fan investors want a haven from the fallout and given the real volatility of course lies in a win for ‘The Donald’, we expect a Trump victory will see a dramatic jump into perceived risk havens, such as the dollar and yen. This will come at the expense of risk, commodity, emerging and frontier currencies. The Russian ruble could do well of course, though much to the detriment of the CE3 (Hungarian forint, Polish zloty and the Czechia koruna).
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The comparisons between the Trump and the Brexit campaigns are numerous and we think there is a decent chance that the market reaction to another ‘outsider’ win would be a true sight to see.
Given the pricing of markets relative to the Brexit vote, a five to eight per cent jump in the dollar upon the announcement of a Trump win is entirely possible. The wider, global implications of a dollar move are obviously more of an issue for countries heavily under the weight of dollar denominated debt in the emerging market and frontier universe.
Issues around the Congressional and Gubernatorial elections will also cloud the picture; the Senate is likely to go Democratic whilst the House stays Republican so executive overreach may be limited no matter who wins. Certainly any legal challenges from the Trump campaign over the legitimacy of the result could prolong investor concerns.
We foresee a Clinton win by a landslide of sorts in the Electoral College, but a tougher deal in the popular vote and it is entirely possible that she will not have a mandate when she steps into the Oval Office on 20 January. As seen with the Brexit vote a ‘black swan’ event cannot be completely priced out of markets and remains a very real possibility with little less than a fortnight of the campaigns to go.