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Mapping the Scenarios for Today’s Election

Today marks the conclusion of an acrimonious US Presidential race, with two candidates promising very different approaches to handling the US economy. As a result, analysts have been furiously mapping out the potential impacts of either result.

If Clinton wins:

Analysts at ING predict that in the case of a Clinton win USD will retrace its pre-election losses and re-couple with Federal Reserve expectations.

“Latest breakout of wage growth from post-crisis range means a Clinton win should see markets (fully) price in a Dec Fed rate hike,” they note.

The ING analysts predict that USD/MXN will move to 18.40, but say that the “Fed factor” limits downside. But researchers at Nightberg warn that even if the US election provides a positive result for Mexico, investors should tread carefully.

“Why? One reason is simply the underlying fragility of the peso itself with external balances still in a state of funk, notwithstanding the relief that would ensue from specs closing the current heavy shorts. Another is the oil dimension that is bringing risks once again as we head into the OPEC meeting on November 30th with specs at max long exposures.

“If an underwhelming supply cut will be delivered, prices are likely to roll over and hit the peso. Meanwhile, local economic conditions are souring as consumers are starting to hold back – setting in the high-watermark for this cycle,” they say.

Looking elsewhere, the ING analysts also predict that USD/JPY up to short-term fair value (107-108) and that EUR prices in ECB QE discount. However, they note that scrutiny over Clinton’s presidential legitimacy adds to US political uncertainty and puts a question mark over December Fed hike.

Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ (BMTU), sees a modest reaction in USD if Clinton is elected as President.

“The initial market reaction to a Clinton win should be more limited as it is already viewed as the likely outcome. Fivethirtyeight.com’s models are now estimating a 70% probability that Hillary Clinton will become President. 

“How Donald Trump reacts to defeat could act as a dampener on the initial relief rally. We believe there is scope for the US dollar to strengthen modestly heading into year-end as a December rate hike from the Fed would be almost a done deal. Long US dollar positioning, although it has increased in recent weeks, is still lighter than during most of last year,” says Hardman.

Fawad Razaqzada, market analyst at Forex.com, takes a more contrarian view, questioning whether a Clinton win inevitably means that USD will strengthen.

“With almost everyone agreeing that stocks and/or the dollar will rise in the event of a Clinton victory, I just can’t help but feel that the opposite might actually happen after an initial knee-jerk reaction. 

“Obviously, if Trump scores a shock victory tonight, then all bets are off. But assuming that Trump will lose, a Clinton victory is admittedly not entirely priced in, so we will probably see further noticeable gains for both stocks and the dollar in the early hours of Wednesday. 

“But that does not mean stocks or the dollar will end Wednesday’s session higher. How do we know, for example, that it won’t be a classic case of ‘buy the rumour, sell the news’ type of an event?” he says.

Meanwhile, analysts at Citibank Wealth Management argue that a Clinton victory today will mean that “USD may remain soft”, while any negative impact on the US economy may be relatively mild and mean that the Fed may hike rates at a gradual pace.

They also note: “Since market risk may fall, high yield currencies

may be underpinned. Investors may pay attention to buy-on-dip opportunities. Although USD/JPY may rebound, USD weakness may limit its upside. 

“Gold price may be impacted in the short term. However, it may rebound to $1,300 in 1Q17 amid USD weakness. Thus, investors may pay attention to buy-on-dip opportunities.”

If Trump wins:

ING analysts predict that “USD/JPY would collapse to 90 under the ‘Trade Wars’ scenario given global protectionism fears and safe-haven JPY flows (recall USD/JPY dropped 10 big figures during the Lehman crisis)”.

They reckon that EUR/USD would go higher, but that the upside potential would be more limited as the Fed re-pricing channel is partly offset by concerns for European exporters. ING also says: “MXN would be the go-to short in the EM FX space under all Trump victory scenarios, potentially testing the 21.00 level.”

Hardman comments that “it is still feasible that Donald Trump could be elected as President, which would trigger a much larger market reaction”.

In this scenario, he predicts that USD would weaken more materially against the major other currencies, especially JPY, as a higher political risk premium is priced into US assets. 

“A sharp US equity market sell-off would reinforce demand for the yen, which would benefit as well from heightened concerns over a rise in protectionist trade policies under President Trump. As a result, we would expect USD/JPY to break below the 100.00-level. The Japanese authorities would be even more wary about intervening to dampen yen strength,” he says.

Hardman adds that the election of Trump would prompt markets to “seriously question” whether the Fed will follow through with a rates hike in December.

However, he says that beyond the near-term, the economic policies under a President Trump could become more supportive for USD because he plans to run a significantly looser fiscal policy, promising large tax cuts for businesses and households and an increase in infrastructure spending.

“The Tax Foundation has estimated that Donald Trump’s tax plans will increase national debt by between USD4.4 trillion and USD5.9 trillion over the next decade. He has spoken of a USD1 trillion building programme. Looser fiscal policy should help to support growth at least initially and increase upside risks to inflation helping to lift US yields. It could prompt the Fed to speed up the pace of monetary tightening offering a more favourable policy combination for the US dollar,” comments Hardman.

In contrast, the analysts at Citibank Wealth Management argue that a Trump victory would mean that market volatility is likely to increase, and may support USD in the short-term. In the longer-term, they claim that Trump’s trade protectionism may slow down the US economy significantly and the Fed may stop the rate hike cycle, triggering weakness in USD.

They comment: “Since market risk may rise, high yield currencies may be restrained and may keep range-trading. Market volatility may surge, triggering fund inflows into JPY for safe-haven purpose. 

“Investors may consider buying JPY for hedging,” while “markets may become significantly volatile, which may increase attractiveness of gold as a safe haven asset,” Citi states.

Galen Stops

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