We’re finally here. Possibly the most divisive, puerile, worrying and tit for tat election the US has ever faced. The Podesta emails have been ruining Hillary’s chances heavily with evidence of corruption and shady dealings.
In terms of the FX markets, we have seen some moves indicative of heavy risk off plays. Note the following charts:
Swiss Franc front month futs
University of Iowa Election Stock Market
We can clearly see here that CHF has acted as a proxy for outright winning sentiment, over the last 6 months at least, when it has been a 2 horse race. Friday we saw the FBI open an investigation into Hillary’s deleted emails which saw Trump’s ‘price’ on the IUESM increase hugely. Accordingly, CHF bids increased heavily as investors looked to flock from US equities and the dollar. We saw a lesser reaction on USDJPY as traders have been consistently bid Yen, but Friday saw CHF shorts puke and traders switch their positions (note heavy long position by commercial specs – red line on first chart).
I don’t want to be a future teller, but looking at the USD Trade weighted index, I can see further risk off moves being made apparent even into the longer term, with the USD downside looking highly exposed. Take a look at the following:
USD Trade Weighted Index (Weekly)
USDJPY vs GBPJPY (Red vs blue)
Rate Hike Probability
Chart 1: strong downside potential pre election on the index. Trumps isolationist policies would follow that the USD would fall in value on a trade weighted basis as countries look to trade exclusive of the US. This probably wouldn’t happen, but it’s the uncertainty that the market could face that would cause the downside.
Chart 2: is there a case that the values of GBPJPY and USDJPY have to converge again? The EU referendum vote caused a value decoupling between many previously correlated GBP vs USD pairs. Many believe a Trump victory could cause a move of -15% on USD and this would certainly cause this value convergence again. This is purely looking at the chart from a technical perspective.
Chart 3: a 25bp rate hike in December is priced in at 68.4%. I do not see the US being able to hike on a Trump win. Again, there is too much uncertainty as to how the economy would cope with inevitable deleveraging if a hike were to take place.