How to trade the election

by Christopher Butcher, 01/11/2016

 

Doomsday = 8th November 2016

 

Every so often we get these types of events that can be earth-shattering to the markets. Not so long ago it was the EU referendum, and before that the SNB EURCHF floor removal. And here we are waiting for the next US president. Whether you like to trade purely technical or not, these events can wipe the floor with anything historic price action tells us.

 

I want it to be clear I have no opinion of who I’d prefer to be elected, and frankly the portrayal in the media of both Hilary Clinton and Donald Trump show some pretty disgusting behaviours – but then again, just because we hear it in the news, doesn’t mean it’s the truth?

 

Hidden media agendas aside, the markets are going to be impacted by this election – and as independent free-thinkers, we must prepare ourselves for what could be.

 

Clinton vs Trump

 

Naturally, our most direct impact is going to be on the USD. Let’s have a look at the proclaimed plans of each candidate:

 

Trump

 

Trump has outlined some of his plans for his first 100 days as president. These include removing 2 million “criminal and illegal immigrants” and denial of visa-free travel to countries which refused to take their citizens back. He’s also made some pretty wild claims about Russia and trade with China, which would result in a big shakeup of foreign policy.

 

Trump’s plans are likely to prove as destabilising for the US economy in the short term – thus meaning an interest rate rise is less likely. So if he is elected, we are likely to get a short-term fall in USD.

 

However, and this is a big however – if Trump’s agendas become so large that the global economy is largely impacted, we find ourselves in a strange situation. USD is a safe-haven currency in times of a global meltdown, and if Trump shakes up global policies enough we could actually see higher demand for the USD as people rush to invest in the safer currencies (This is known as risk-off).

 

Clinton

Despite what we have heard about her, Clinton is perceived as the safer option for US president – and the odds are certainly in her favour in the run-up to doomsday. With Hilary elected, we are more likely to see less of a shake-up of the current policies, and thus more of a likelihood of an increase in US interest rates. For this reason the USD is more likely to rise if she is elected.

 

There are other considerations in the run up to the election that we must consider.

 

Interest rates are to be announced on 2nd November, before the election, with a market expectation of them remaining the same (at 0.5%). If Hilary is elected, our main argument for a USD surge is the likelihood of her increasing the interest rates, which becomes less of an impact if they are surprisingly increased on 2nd November. So if rates are increased on 2nd November, the USD will surge prior to the election and in the case of a Hilary victory thereafter, the trade becomes less worthwhile.

 

What are the markets saying now?

Bookmakers are pricing a significant lead to Hilary Clinton.

The markets support this idea of a Hilary lead. Take a look at the USD index - this can give us faith that a Hilary win could result in more USD strength.

 

 

 

Conclusion

With a Trump election potentially having both a positive and negative impact on the USD depending on his policies and global economic response. I feel the real immediate driver in USD reaction is going to be interest rates, and so if they are surprisingly increased on 2nd November, I’m more than likely going to sit out altogether over the election.

 

Like we have seen, the market shows a significant advantage to Clinton in the run up to the election, and so the trade likely to have the biggest impact is a Trump victory – and our USD reaction to this is very dependent on the global response to his plans, however in the immediate short-term I believe the USD has a higher chance of falling if this were the case.

 

With interest rates, non-farm payroll and the election all falling within a week of each other – an absolute must in the potential market conditions just ahead of us is to scale down our position sizes and monitor our risk closely.

Whilst I won't be ruling out trading all together over this period, it's definitely a sensible time to be extremely selective of your trades.

 

Happy trading, and don’t forget to vote!

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