EUR, CAD, USD and MXN Forecasts Should Trump Win Today's Vote

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Currencies are expected to be subject to considerable movement after the US presidential election on Tuesday night and Wednesday morning, especially if Donald Trump wins.

If investors have been reassured by the low probabilities quoted for Donald Trump winning the presidency - which peaked at 35% last week after email-gate and have since fallen to circa 17% following its closure -  they should take heed of the recent referendum in the UK, which highlighted how sometimes even the unthinkable can happen.

With the UK referendum on membership of the EU, there was a quiet complacency that the safe and sensible option would prevail, and up until the last week that was backed up by a relatively safe lead for Remain in polls, however, on the day, a silent majority emerged to vote for camp Leave.

There is a case here to argue that the Trump and Leave vote are similar: both are predominantly white, blue-collar, not privileged, protectionist, non-tertiary educated, right of centre and deeply patriotic.

As such it also seems possible a ‘shy’ hidden vote could come out in favour of Trump on the day.

After all, who would admit to voting Trump in a telephone or face-to-face poll?

Just as many closet ‘Leavers’ were afraid they would be branded ‘racist’ for voting Leave, the same may also be possible for a secret mass of Trump supporters who likewise may be afraid of the stigma of voting for the candidate they actually deep down prefer.

So, it is with some caution that we interpret the low probabilities of a Trump victory as there is a possibility of a shy majority upsetting the expected result.

And it is with a Trump win, even more than the currently assumed Clinton win, that the most impact will be felt by financial markets, especially foreign exchange.

For, as noted by J P Morgan’s John Normand, in a recent preview of the election, "of the macro asset classes, currencies should react the most to a Trump victory since his protectionist trade measures (tariffs on Chinese and Mexican imports) are easiest to implement via executive order than a fiscal programme requiring Congressional approval.”

The report goes on to specify the Mexican Peso and Canadian Dollars as being the biggest losers from a Trump ascendancy as they would stand to have the most to lose from the introduction of trade tariffs.

Despite some risk premia already being priced in, Normand says:

“We still think that the reality of a Trump victory could deliver at least 5% additional declines in CAD and 8% in MXN on Day 1 as markets overshoot due to an unprecedented environment of NAFTA disruption (both countries), restriction on worker remittances (Mexico), or extreme rate cuts (maybe two in Canada).”

Normand is keen to point out, however, that losses would be relatively short-lived.

“After Day 1, MXN’s depreciation could retrace quickly given that Banxico would probably hike 100bp and conduct FX intervention.

"CAD would retrace too but more modestly over the subsequent week and month since the currency is already cheap and because Congress could restrain Trump’s most protectionist tendencies.”

He sees the euro as appreciating in the case of a Trump victory due to the single currency’s tendency to benefit when “Washington creates an inhospitable investment climate.”

On the day after a Trump victory (with a Republican House and Democrat Senate) Normand sees EUR/USD at 1.13, USD/JPY at 100.00, USD/CAD at 1.42 and USD/MXN at 21.10.

A week after he sees EUR/USD at 1.15, USD/JPY at 99.00, USD/CAD at 1.3840 and USD/MXN at 20.60.

In the case of a Clinton win, there would be much less change, with EUR/USD at 1.11, 105.00 for USD/JPY, 1.30 for USD/CAD and 18.25 for USD/MXN.

A week after a Clinton victory would see the pairs at 1.11, 104.00, 1.32 and 18.00 respectively.

ING Bank see similar pathway

A similar scenario analysis is proposed by Dutch Lender ING bank.

They too see the close trading neighbour currencies MXN and CAD being badly hit by a Trump victory and the euro appreciating.

Overall the bank’s FX Strategist Viraj Patel sees the US Dollar appreciating in the case of an outright Clinton victory, as it would reassure markets and increase the probabilities of the December rate hike from the Federal Reserve.

A Clinton victory might strengthen the dollar even more than is currently forecast says City Index’s Kathleen Brooks, who foresees Clinton presidency as leading to increased public spending and therefore less pressure on the Federal Reserve to keep interest rates low and accommodative.

The consequent potential steepening the interest rate trajectory would benefit the Dollar, although it might also frighten financial markets and impact negatively on global risk appetite in the medium term:

“The risk here is two fold: Yellen has warned Congress that she wants the government to do more heavy lifting when it comes to the economy through fiscal policy, as opposed to monetary policy, which could give the Fed room to tighten interest rates further under a Clinton Presidency.

“This could actually end up being the most frightening outcome for the financial markets, as risk markets have become accustomed to low interest rates,” writes Brooks.

A Recount

ING include a scenario not covered by J P Morgan such as the relatively probable outcome of the election requiring a recount as it is too close to call.

Interestingly in the case of a recount, which could take months, they see the Federal Reserve delaying the expected December rate hike, which would be deleterious for the Dollar.

For ING’s Patel, a Clinton win with an expected Democrat-controlled Senate and Republican House would see EUR/USD at 1.09, USD/JPY at 106, and USD/MXN at 18.40.

In the case of a Trump victory, on the other hand, Patel sees the pairs at 1.13, 97.00 and 20.00.

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Key Results

The key battleground for the election will be Florida and North Carolina, with Trump requiring a good showing here to win.

“Florida was famously the depository of hopes of a better life by the anti-hero drifters of 'Midnight Cowboy'. Various commentators have pointed out that the hopes of a Trump presidency necessarily run through the Sunshine State,” comments Societe Generale’s Alvin T Tan.

Whilst North Carolina has swung in favour of Trump recent polls show Florida is still undecided.

According to ING, there are various scenarios which could play out as follows:

a)    If Trump loses Pennsylvania then he needs to win both Florida plus the key states of Nevada, North Carolina, New Hampshire and Colorado.

b)    If Trump loses Florida he needs to win Pennsylvania, the four key states mentioned above and get a swing in one of the Clinton held states of New Mexico, Minnesota, Virginia, Wisconsin or Michigan.

c)    If Trump gets neither Penny or Florida, then he needs all the key states and at least two of the Clinton held marginals listed above.

Election Night Timetable

Markets will probably react well before the end results are published given the heightened importance of certain key battleground states such as Pennsylvania and Florida.

Polls will close and exit polls will be published at 19.00 ET and 00.00 GMT.

From the markets POV, all the action will happen between 20.30 and 21.00 ET, which is 1.30 to 2.00 GMT, when the key marginal states will announce their results and the day will be decided.

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