How the US election outcome could impact USD
The result of the Nov 8 US election threatens some explosive volatility in the forex markets with the outcome to be known the following day (Nov 9 in eastern time). The two candidates have such different agenda, yet are running neck and neck in the polls creating plenty of uncertainty.
Though Democratic Party candidate Hillary Clinton, who embodies the establishment and continuity is expected to win – the polls suggest scope for an upset. If she wins, the likely reaction of the USD is a move upwards, a victory by her rival Donald Trump could be a sell-off, and a corresponding sharp rise in JPY and CHF – the two safe-haven currencies, which would likely be joined by gold.
There are some expectations for a Trump victory to lead to a big sell-off in emerging market currencies (due to threats over repealing various trade treaties) and risk assets, such as stocks, due to the economic uncertainty that would follow. If there is prolonged market turmoil – the US Federal Reserve could scrap its December rate hike, which looks confirmed after US Non-Farm Payrolls showed 161,000 jobs were created in October.
But over the longer-term the impact made by either candidate on USD and US interest rates could be muted.
Both come with a lot of political baggage and will potentially face strong domestic opposition to many of their policies and could spend much of the Presidential term spinning their wheels. In the long-term, Trump may prove more bullish for USD. He is thought likely to spend more than Clinton – potentially putting pressure the Fed to raise rates a bit more aggressively -- and he is keen for US companies to repatriate much of their USD 2.5tn hoard of cash back home through promises of much lower corporate taxes. If achieved that could be USD bullish.
Where Trump could have a big indirect impact is on the EU, the Eurozone and the EUR.
He has strongly identified himself with the Brexit referendum victory in the UK – basically posing as an anti-establishment maverick. His victory, following on the heels of the Brexit victory, could embolden anti-EU parties and negative public sentiment fuelling renewed concerns over the break-up of the Eurozone, which would certainly be negative for the EUR. Trump has also voiced doubt over maintaining a solid US commitment to NATO, at a time when Russia looks particularly menacing. Any such declaration would leave the EU’s eastern borders looking vulnerable and would likely spark a flight to safety out of the EUR and to gold, JPY and even USD.
TECHNICAL ANALYSIS: MXN/JPY – a good way to play the US election?
MXN (Mexican Peso) is widely seen as a barometer for the US elections and reacts particularly negatively to news suggesting a win for Donald Trump and is most likely to be a particularly big beneficiary of a Hilary Clinton victory.
JPY, meanwhile is one of the ultimate safe-haven plays and will likely rally hard if Trump wins – therefore making MXN/JPY a good play as the election result emerges early on Nov 9.
A Trump victory is likely to see MXN/JPY crashing through support at 5.332, 5.276, 5.178 and ultimately clear away long-term support at 5.027 and even go below 5.000. On the upside, a Clinton victory should spark a relief rally for MXN and it should be able to recoup a decent proportion of its pre-US election losses. Resistance levels of 5.556-8, 5.663 and 5.779 should be swiftly cleared with the prospect of eventually breaching 6.000.
Given the sheer magnitude of the event and its decisiveness in dictating currency movements -- other technical indicators such as Bollinger bands, slow stochs and so on will provide few clues on direction ahead of the big news.
By Justin Pugsley, Markets Analyst, MahiFX