Good morning,

It’s over

15 months of campaigning draws to an end later today as the most divisive Presidential election will finally see a winner crowned. Analysts are expecting as many as 130m people to vote for the candidates but also for Governors, Senators, Congressmen and women and on local referendum matters by the end of the night.

Where to watch?

There are maybe 14 or 15 battleground or swing states that will be the determining factors within this election; Georgia and Virginia see their polls close at midnight, North Carolina and Ohio at 0.30am, Florida, Illinois, Maine and New Hampshire at 1am with Colorado, Michigan, Minnesota and Wisconsin coming through at 2am and finally Arizona, Iowa and Nevada at 3am.

The latest polling suggests that Hillary Clinton has a lock on the majority of these important states with only Georgia, Arizona and Ohio leaning in favour of Donald Trump; these things can change very quickly however.

Polling points to 2014 not 2016

Trump has garnered a lot of headlines in the overnight session as he continued to tie his message to the Brexit phenomena and noted that America could now celebrate its Independence Day. As much as we have tied the election prospects of Trump to Brexit and vice versa and all the political news in between from a polling point of view the similarities are stronger with the Scottish Independence referendum than that of the EU referendum.

The ‘No’ campaign were in the lead the entire time through the Scottish referendum apart from one poll a fortnight before the vote that saw the ‘Yes’ campaign in the driving seat; the bounce back was large and vigorous. For all the polls that we have seen in the past month only 1 – an ABC poll released the day after the 2nd investigation into Hillary Clinton was announced – has seen the Republican Candidate in the lead. It will be tight tonight and the polling is telling a very one-sided story.

Pricing and Reaction

As much as Brexit was inappropriately priced into markets – as anyone sat watching the screens in the early hours of June 24th will testify – there is even less of a probability of a Trump win priced into markets. To say that Brexit caused a market spasm is to say that a Republican victory on November 8th could cause something truly spectacular.

If Trump wins

When the proverbial hits the fan, investors want a haven from the fallout and given the real volatility of course lies in a win for ‘The Donald’ we expect a Trump victory will see a dramatic jump into perceived risk havens, such as the JPY and the USD. JPY will be the winner overall but USD will gain against AUD, MXN, GBP and other riskier currencies.

The comparisons between the Trump and the Brexit campaigns are numerous and we think there is a decent chance that the market reaction to another ‘outsider’ win would be a true sight to see. We are looking for an initial sell-off in the USD but a heavy rally back – somewhere around 5-8% – for the greenback in the days after the vote. The wider, global implications of a USD move are obviously more of an issue for countries heavily under the weight of dollar denominated debt in the emerging market and frontier universe.

There are risks to this forecast of course and this will largely come from happens lower down the tickets and away from the spotlight of Clinton vs Trump.

As well as the Presidential election, all House of Representatives members (totalling 435) are up for election once again as well as 34 Senate seats and 12 Governors on November 8th. Currently the Republican Party holds majorities of 30 seats in the House and 4 in the Senate. A split in the Legislative and Executive branches can lead to policy gridlock, as we have seen in Obama’s 2nd term compared to the 1st, at least until the Midterms in 2010.

We think that the Democrats will manage to overturn the state of play in the Senate and this will act as a roadblock to Trump’s wilder plans on trade, immigration controls or tax cuts. We do believe however that Democratic control of the House is a much taller order and doubt it will take place. Any result that keeps Washington a centre for gridlock and not politics could temper some of the fallout in currency markets but this will only happen after the initial sell off.

Obviously any calls or legal challenges from the Trump campaign over the viability or legitimacy of the result could prolong investor concerns.

If Clinton wins

We have spoken of the similarities between the lead-in to the Brexit vote and the Presidential vote many times; risks are rarely cut from cloths as similar as these political events. The similarities start to fall away however when we look at the options markets and the reactions in the pricing of products used to gauge and hedge against the risk of an adverse currency move. In the below graph, the orange line represents the movement in the price of options used to hedge against the risk of Brexit via GBPUSD while the blue represents hedging of dollar losses in USDJPY – a cross that we would anticipate being a market focus in the event of a Trump victory. As we can see, hedging downside risk in USDJPY was more expensive pre-Brexit than in the lead-in to the election.

As it stands at the moment Clinton is in the driving seat with an overwhelming majority in the polls and as such a Clinton win is still very much priced into markets. On the basis of a Clinton win we anticipate a slight run lower for the USD, JPY and EUR as investors bid up emerging market risk on lower risk aversion sentiment. Sterling would likely benefit against the US dollar but the focus and glare of Brexit would surely return. In wider markets we would anticipate shares to rise globally in a brief and uninspiring relief rally.

Whatever happens, it’s a new dawn for America

Have a great day.

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