I am probably not the only person nervously awaiting the outcome of next week’s US election, although I suspect many have much different – and to them much more important – reasons.
My concern is that in spite of it being a "known-unknown" the FX market is facing a major event - and this is on a global scale not the relatively local affair of Brexit - and its recent form when it comes to handling a massive surge of business is not great.
As polls in eastern states closed the FX market has seen some whippy price action, however according to dealers spreads remain reasonable.
USD/MXN, widely seen as the bellwether of the election outcome, has whipped around, from 18.30 when polls closed it has hit a high of 18.44 and a low of 18.1650 and was, ironically, last trading at 18.30. “The market is keying on Florida,” an Asian-based trader tells Profit & Loss. “It looks tight but you can track the updates by the moves in USD/MXN.”
Sources are reporting “very high” volumes in FX markets as uncertainty over the outcome of the US election increases.
With some polls still open in the US the financial markets have swung 180 degrees from expectations of a Hilary Clinton victory towards “too close to call” and in some cases a Donald Trump win.
The growing shock of the pollsters once again getting it wrong has seen USD/MXN – the benchmark for the election as far as FX markets are concerned, sky-rocketing almost 12% from 18.30 to 20.48. The impact has been felt elsewhere with USD/JPY dropping sharply from above 105.50 to 101.50 and EUR/USD rising from 1.10 to 1.1231.
In a result that was not seen by pollsters or markets, Donald Trump has, according to US networks, won the US presidential election.
As results came in through the night and the swing to Trump became apparent, equity index futures were crushed, Japan’s Nikkei Index at one stage being 1000 points down, and the US dollar was hit hard as part of a “risk off” trade.
USD/MXN, the bellwether pair for the election, dropped to 18.1650 in trading soon after polls closed as exit polls predicted a Clinton victory, however as Trump crept up in the polls the pair jumped higher, ultimately hitting a high 20.77 – a fall for the peso of 14.3%. The fall in the peso prompted Mexican authorities to call an emergency meeting to discuss their response to the financial fall out from the election.
“Following the US election, global markets have reacted in predictable panic. Equity markets [and] the dollar sold off and gold rallied,” notes Kerim Derhalli, CEO of invstr.
Profit & Loss previously reported on the immediate aftermath of the surprise US election victory for Donald Trump, but the question facing markets now is: what next?
“Key will be now whether or not Trump will prove to be a populist or a pragmatic president,” says Valentijn Nieuwenhuijzen, chief strategist and head of multi-asset at NN Investment Partners.
As FX markets continue to anticipate what will happen next following Donald Trump’s surprise victory in the US Presidential election, there could also be significant changes in the country’s regulatory landscape that financial services firms need to consider.
For starters, the Commodity Futures Trading Commission (CFTC) could look very different.
Historically, when there’s a transition of parties, the Chairman of the Commission has tendered their resignation on the inauguration day of the new President and then the remaining Commissioners vote amongst themselves for an acting chairman.
Putting aside all jokes about the UK’s disappointment at losing their “dumbest electorate crown”, I’ll keep this brief because the world is still coming to terms with how the “experts” once again got it hopelessly wrong. So just to say yes, the FX market was very orderly yesterday as the results came in but (there’s always a ‘but’ remember), we are in no way out of the woods. For just as this was a eerie echo of Brexit, so too could market behaviour be in the coming months.
With the immediate market risk of the US elections having diminished, Saxo Bank has returned its margin requirements to normal levels, with the exception of GBP pairs.
Saxo raised margin requirements ahead of the US election to try and ensure that its clients were appropriately leveraged going into what it expected could be a significant market event.
It raised the requirements on most major FX pairs up to 2%-3%, with MXN and RUB going to 15% and 10%, respectively. Claus Nielsen, head of markets at Saxo, comments:
Donald Trump’s position on the currency manipulation provisions in US trade deals could lead him into direct conflict with US Treasury once he assumes the presidency, according Dick Cunningham, a senior international trade partner at Steptoe & Johnson’s Washington office.
Speaking on a webinar examining some of the implications of this week’s US presidential election, Cunningham noted that Trump has vowed to kill the proposed Transatlantic Trade and Investment Partnership (TTIP).
One reason why Trump has criticised the TTIP in the past, said Cunningham, was because although it contains a currency manipulation provision, the provision is not enforceable.
Matt Kulkin, a partner at Steptoe and Johnson, explains to Profit & Loss deputy editor, Galen Stops, why a “copy and paste” approach to regulation won’t work for FX.
FX is often referred to as an “unregulated” or “self-regulated” market, and yet in recent years bans have been fined billions of dollars by regulators for alleged infractions in this market, while criminal charges are being brought against FX traders in the US courts.
Kulkin explains this disparity by pointing out that the entities involved this market are regulated and therefore subject to oversight by a various national authorities. However, unlike the securities markets or the OTC derivatives markets, there aren’t concrete regulations regarding the market place, he says.
Comments made Sunday by US president-elect Donald Trump on Twitter have sparked fresh speculation as to whether his administration will label China a currency manipulator once he is in office.
China lodged a formal complaint to the US government after it emerged that Trump held a phone call with the President of Taiwan on Friday, in breach of decades of diplomatic protocol.
“I can tell you that the Chinese side has lodged solemn representations with the relevant party on the US side both in Beijing and Washington. China has got its message across to the world as a whole with regard to Taiwan-related issues. The US side, president-elect Trump's team included, is also fully aware of China's solemn attitude on the issue,” said the Chinese Foreign Ministry spokesperson, Lu Kang, in a press conference today.
Inaugural financial markets research from the JP Morgan Chase Institute studies trading behaviour around three major market events, and while the findings will not come as a surprise to most FX market participants – active traders were much more involved in the market than passive investors or corporate hedgers – they should prove useful to central banks as they come to terms with a changing market structure.
The research, FX Markets Move on Surprise News, was written by Diana Farrell, Kanav Bhagat and Chen Zhao at the Institute and looks at three specific surprise events, the Swiss National Bank’s decision to remove the EUR/CHF floor in January 2015, the Brexit vote in June 2016 and the 2016 US presidential election.