- Final outcome may take some time to crystallise
- US election procedures are a crazy quilt of different polling systems/closing times
- Very first indications will start coming in at 2300 GMT
- A big Clinton win would be the most straightforward outcome for markets
- A narrow Clinton victory would be fraught with uncertainty
- If Trump wins, it will likely be by a very narrow margin
- A Trump victory would be stimulus for strong “risk-off” trade
- A tie would be an almost unthinkable scenario implying very ugly, two-way volatility
It's here. It's now. It's happening. Image: iStock
By John J Hardy
As we tilt towards election day, it’s worth considering how the markets will react under a number of scenarios, and because of the odd nature of this election, we would caution that the final outcome may take some time to crystallise if Clinton isn’t winning in a landslide, as Trump’s concession is not a given.
Timing of election results
The US election procedures are a crazy quilt of different polling systems and closing times, with some states allowing early voting and others not. The very first indications will start coming in at 2300 GMT, when parts of Indiana and Kentucky close, with more significant states closing at 0000 GMT (most of Florida) and 0030 (Ohio and North Carolina). Within a few hours of each of these closings, we should have a clear sense of whether the result will be close, with the assumption that only Clinton has the chance of a landslide, while a Trump win would be a close call.
Short-term reactions under a number of scenarios
Clinton wins big
This is the most straightforward outcome for markets, as even a Trump whining about a rigged election would likely yield quickly to a concession if the popular vote is at 3% or better in favour of Clinton as indicated by some of the latest polls. Our approximate guesses: USDJPY jumps to 107+, EURUSD backs down below 1.09, USDMXN dives well below 18.00. The risk-on currencies might be a bit mixed in this scenario – USDCAD dips might be modest, while AUDUSD might just try a significant run higher due to the importance of the 0.7700/50 zone if it falls after all of the recent positive noise on China.
Clinton wins by narrow margin
This scenario is fraught with more uncertainty, as the market will try to react initially as indicated above, but with perhaps far less amplitude until Trump concedes or, more likely if the vote is particularly close, cries that the election is rigged and demands some kind of investigation into “Get out the vote” practices by Democrat operatives on the ground, etc… The uncertainty could drag on for days and even weeks.
Trump wins by narrow margin
If Trump wins, it will likely be by a very narrow margin, taking much of the night to figure out if the win is valid – plenty of treacherous two-way action all night long in this scenario. If Trump prevails in the end, we would expect this to serve as a stimulus for a strong “risk-off” trade: the USD would likely tank against the JPY (USDJPY 100?) and EUR (EURUSD 1.1500?) and CHF. Elsewhere, the Mexican peso could be in for a shocking reassessment – sending USDMXN perhaps to 20.00 or higher and the riskier currencies might gyrate first higher and then lower (due to risk-off) versus the greenback. The key uncertainty is on the future of the Fed leadership as Trump has explicitly said Janet Yellen would be out. It’s far less against the riskier currencies; the USD might lose far less ground, as these tend to be sensitive to a drop in risk appetite that would likely accompany a Trump win.
It’s a tie!
This is an almost unthinkable scenario, but it has higher odds than may seem possible, given the mix of states where Trump and Clinton are close in the polls. All bets are off on how long it would take the electoral college/Supreme Court (possibly divided 4-4 as it is missing a justice)/House of Representatives (247-188 in favour of Republicans) to make a decision about who will be the next president. This would mean very ugly, two-way volatility at constant risk of large reactions to the latest headline – almost untradable.
Also watch Congress
Our assumption is that the Senate could tilt either way while the House of Representatives will remain in Republican hands. The Congressional makeup is critical for whether a Clinton or Trump presidency can effect any forceful new policy. The assumption is that a Clinton presidency with only the Senate (not a given) on her side would mean very little in the way of new policy for the next two years. Meanwhile, a Trump presidency could still mean a lack of new policy, even if both houses are in Republican hands, as a subset of Republicans are overtly anti-Trump.
The longer term is something we’ll be discussing in coming days and weeks. If the market assessment is correct that Clinton will win, it’s a tough task to conjure up anything new for the first two years of her term unless we have a new economic crisis on our hands during that time frame. Republicans may not be all pro-Trump, but they are certainly all anti-Clinton. On the other hand, while a Trump presidency might see higher odds of new policy, especially on corporate profit repatriation (most likely area for bipartisan cooperation) or on fiscal stimulus at the margin, the bigger risk that will linger well into 2017 will be the future of the Federal Reserve, as Trump has been explicitly anti-Yellen.
will likely prove sensitive to the outcome of the election. Given how high the action remains despite the market’s slight pre-celebration of a Clinton victory, we’re wondering how significant the immediate selloff might prove if she does indeed win. On the other hand, a shock Trump win could see the pair quickly challenging toward 1.1500.
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The G-10 rundown, election edition
USD – Trump/No Trump is the supposed binary outcome, but there is also the unthinkable tie scenario and the more likely scenario in which Clinton wins by a narrow margin and Trump refuses to concede, as discussed above. Medium term, we see the US dollar bobbing back higher regardless of the outcome.
EUR – The euro is likely a safe haven trade on a Trump win or even a close call if Trump doesn’t concede, but we look for the euro to sell-off if Clinton wins as this would clear the road to a December rate hike from the Fed.
JPY – perhaps the highest beta currency to the US election outcome, as USDJPY could snap significantly higher on a clear Clinton win, while the JPY could strengthen sharply if investors are seeking safety in bonds and fleeing risky assets on a Trump win. This might provide attractive opportunities to fade JPY strength as we believe the JPY is headed lower in 2017.
GBP – uncertainty all around – perhaps a relief rally if the euro weakens on a Clinton victory, but watching 1.2500 in GBPUSD as well for whether this resistance holds.
CHF – EURCHF slipping lower despite the resurgence in risk – we might have to reassess the ranges here, and the Swiss National Bank may need to refresh its policy playbook if it wants to keep the pair at these levels and the European Central Bank is able to pull of another round of easing.
AUD – The market seems desperate to take AUDUSD above the resistance zone and it might succeed under a Clinton win (USD strength not as broad and carry trades rally sharpest), but very sceptical of its ability to sustain a larger rally above this level beyond the near term.
CAD – has been asleep at the switch despite oil's collapse as the market is distracted by Trump/Clinton. CAD looks vulnerable almost either way even if it risks a short sprint higher in the event of a Clinton win, given the plunge in oil prices.
NZD – same as for AUD, but with added twist that the Reserve Bank of New Zealand meets on Thursday (or tomorrow evening for us in Europe). We’re long-term bears on NZD, with no short-term hook as the technical case for downside against the USD has been neutralised – let’s see if it re-emerges by the end of this week or whether AUDNZD can find support after testing last-gasp Fibonacci levels below 1.0500.
SEK – 10.00 in EURSEK was in play yesterday, with the action shying away from that level as risk appetite has rebounded strongly – but what is the upside for SEK in a Clinton win if the interest is in carry trading as SEK only offers negative carry?
NOK – little reactivity to US election – more about struggling oil prices and risk that EURNOK slips back into the higher range again. A Trump win might be seen as more bearish for oil (opening up Alaska for drilling, etc…).
Upcoming Economic Calendar Highlights (all times GMT)
- 2300 – first polls close in the US, in Kentucky and Indiana
- 0000 – rest of Kentucky, Indiana polls close, most of Florida polls close, as do those for Virginia, Georgia
- 0030 – Ohio, North Carolina polls close. Counting from these states and the states above may give indication of election result within two hours if margins in favour of Clinton are large, so 0230 or thereabouts. Otherwise, traders should settle in for a very long night likely to spill into Wednesday.
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank