While some see a Trump victory as Brexit x5 or x10, the reaction in foreign exchange markets could be different. The team at Morgan Stanley explains what’s expected for the elections:
Here is their view, courtesy of eFXnews:
FX for risk hedging: The S&P 500 has fallen 4.2% below its August top, which seems marginal in respect of recent developments in FX markets, seeing in particular JPY and CHF rallying. It seems investors are looking for hedges instead of liquidating yielding asset holdings, and these hedges are executed in places where there is ample liquidity. Here the FX market qualifies. It seems US Presidential election fears are dominating, as illustrated by aspects of currency trading yesterday when the Fed statement confirmed our view that the Fed is heading for a December rate hike.
The opposite of Brexit: On a ‘normal’ day, investors may have picked up the Fed talking about rebounding inflation rates and better labour markets. Accordingly, one should not expect a strong US October labour market report due tomorrow to make any difference. In many aspects, the markets seems to be in an opposite mood to the pre-Brexit situation when investors got over-optimistic about the UK voting in favour to stay in the EU, clearing the way for a big disappointment when it became clear that this optimism was unjustified. Nowadays investors seemingly try to ‘avoid the Brexit mistake’ and prepare for a market-unfriendly outcome.
There are two conclusions to draw from this observation.
First, USD selling may continue into election day unless opinion polls, for whatever reason, swing back more into Clinton’s favour.
Second, on November 8, markets may be best prepared for a market-unfriendly outcome. Hence, a risk-favourable election result may push USD sharply higher while options markets may converge towards lower volatility levels.
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