Now that TRUMP has taken a huge lead even in the rigged polls, mostly due to the FBIs decision to pursue a criminal investigation into not only Clinton but 5 of her aides and associates, but also due to some surprise TRUMP support from would be Democrat supporters like Peter Theil; it’s time to take a quick look at what a TRUMP victory will mean for the markets, and most importantly, for FX. As we explain in Splitting Pennies – Understanding Forex – Forex is the ‘super market’ where all other markets converge. That’s because if you sell your stocks, you actually buy dollars. So what will happen when TRUMP wins?
Forex banks & brokers have been sending out the following warnings to customers, as is normal policy preceeding such an event:
With the upcoming US Presidential Election, it is very important that you are comfortable with the exposure on your open positions leading into the vote. There is uncertainty around the outcome, and market conditions in the immediate aftermath are expected to be volatile with the risk of price gaps, wide spreads and possible periods of thin liquidity. Please ensure you have sufficient margin cover by adding further funds or reducing positions by Monday, 7th November 2016.
If you have any questions, please do not hesitate to contact Client Services by calling +44[REDACTED] or emailing info@[REDACTED]
FX and CFDs are leveraged products that can result in losses exceeding your deposit. They are not suitable for everyone so please ensure you fully understand the risks involved.
Brokers themselves have been penalized for their lack of internal risk controls to manage such events, as was seen in the recent SNB surprise:
Banks, brokers and individual investors were left with hundreds of millions of dollars in losses a day after an unexpected surge in the Swiss franc sent shock waves through markets. FXCM Inc., a major U.S. retail foreign-exchange broker, emerged as the biggest victim so far and had to be rescued by an emergency $300 million lifeline from investment firm Leucadia National Corp.
This was less obvious during Brexit, because the move was orderly, and happened over a period of hours. However, brokers learned to reduce margins during such events. Since FXCM’s insolvency, brokers will now reduce leverage in the days leading up to such an event, and monitor positions during an event. Each broker / bank has their own policy about this, but ALL FX Banks & Brokers have been notifying clients of volatility and liquidity issues surrounding the US election.
The worst case scenario
The worst case scenario for FX markets is a close election – TRUMP is already preparing to challenge a close election due to the high reports of election rigging, including but not limited to – dead people voting, people voting multiple times, electronic machines over-reporting democrat votes (controlled by pro-Democrat companies like Soros but many others), lack of reporting of TRUMP votes, voter intimidation, voter registration confusion, and other petty tactics. (CIA has had a lot of practice in how to meddle in elections without being too obvious, something Clinton recently admitted when she said we should have elections in Palestine only if we can ‘control the outcome’).
In this worst case scenario, markets become thin and volatile and tick up 50 – 100 pips on each micro-result, a poll that comes out pro-TRUMP – then an event happens that’s pro-Clinton. Or who knows, with a Democrat in the White House, elections can be postponed. Any of these scenarios is a worst case for FX, as markets will wait for an outcome. Markets don’t like uncertainty. 99% of FX traders will wait on the sidelines until a clear winner emerges, uncontested. But that 1%, it can make FX more volatile than ever. This event has the potential to be the most volatile FX event in the history of FX. That is, it has the potential.
What’s the best case
If a winner emerges early, even before the election is over, markets will not be volatile.
Is TRUMP good or bad for the USD?
Democrats have huge Wall St. backers and there is a perception that a Clinton win is market up. That may be a self-fullfilling prophecy, or it may be because of the market perception that it means business as usual – and business for Wall St. is good. Wall St. loves QE. More money!
But FX is not so simple. The most important fact regarding if Trump is positive or negative for the USD has to do with Fed Policy, and although TRUMP has talked about ‘too much debt’ and that he’s a ‘master of debt’ he’s never come clean on what he thinks monetary policy should be, or if he would do anything about it. In the most extreme case, TRUMP could unwind the Fed. The Fed was created by an Act of Congress (like Obamacare) and the chairman is appointed by the President (although, the Federal Reserve is owned by private banks and individuals).
But, it seems that based on market events, that a Trump win would be good for the USD. Here’s one example:
“Should Trump manage to stage a big-enough come-back in polls, we think the associated uncertainty would instead be USD-positive via an adverse hit to global risk sentiment as well as due to a greater implicit threat to world trade.” He argues that over 60% of world trade is conducted in dollars, and we live in a ‘dollar-centric’ world. Because of this fear of dollar weakness in the more uncertain world following a Trump victory would lead to more “asymmetric hedging” – where investors would buy dollars to hedge against a fall – and “USD funding mismatches” which would actually help the dollar rise.
When it comes to currencies, the highly-touted “Trump Trade” has revolved largely around the Mexican peso. It has been no secret that US Presidential Candidate Donald Trump’s heavily protectionist trade policies, not to mention his stance on immigration, have targeted Mexico in particular. Besides proposing to build a wall between the US and Mexico, Trump has also repeatedly expressed his staunch opposition to the North American Free Trade Agreement (NAFTA) and has proposed broad restrictions on both Chinese and Mexican imports. The result has been increasing speculation that if Trump is seen to win the presidency, the Mexican peso could suffer dramatically against the US dollar. Although there was no substantive discussion during Sunday’s presidential debate between Hillary Clinton and Trump regarding policies towards Mexico, it has been well understood that the Mexican peso currently has a high positive correlation with Clinton and an inverse correlation with Trump. This should continue to be the case at least until the election occurs in early November.
In case you don’t trade FX, it isn’t possible to just ‘buy’ the US Dollar, it must be traded against something else, i.e. the Mexican Peso. So if the US Dollar does rise, there are several key currencies to watch out for, the first and most important being USD/MXN. If you want to trade this, click here and open an account with only $1 minimum.
The long term USD impact
Probably, a TRUMP Presidency would see the logical ‘way out’ to clean up our economy which is largely based on artificial ‘bubble-assets’ would be simple: RAISE RATES. What would happen if the Fed raised rates to 5%, 10%, or more? The USD would rise. It would be GREAT for the economy, and for America. Money would flow from all countries into USD. The USA is a net importer, that means logically, a net importer should have a strong domestic currency policy (because, it means that the cost of goods and services from other countries, is much cheaper). Consider for example, that high end BMW you want, it’s priced in Euros which are discounted 50%. Wal-Mart products, would be 50% or 80% less. It could reverse years of inflationary decay. Yes, it would crush American exporters, but that could be addressed separately. Already, via the Farm Bill, billions of dollars of US Government subsidies control key industries and markets such as agriculture, steel, energy, and others.
The other benefactor of high USD rates would be retirees, who have annuities and other interest rate dependent investments. Poor, poor, grandpas and grandmas are living on a fraction of what they really need to retire. Low interest rates are good only for asset inflation, speculators, Wall St., big government, hedge funds, investment banks, and really really rich people. Low interest rates, and ZIRP hurts the real economy, puts pressure on the jobs market, squeezes the working class, and stifles growth.
Wall St. may be preparing for such a scenario, which would bankrupt half of the S&P, as public companies have become addicted to QE so much, like a crack addict, they forgot even what their core business is. They just need to refinance, re-allocate, and retain. QE has become the core business of more than 50% of public companies.
Other notes about FX – there are no ‘trading curbs’ – that means that theoretically, the USD can go up or down by 50% in one tick. Or 10,000%. It’s not likely, but look what’s happening in Venezuela.
So if you’re going to trade, be alert! There will be lots of trading opportunities! But beware – as there can be unusual circumstances like wide spreads (like we saw in 2007/2008) which can wipe out any quick profits. Banks can have servers crash. Such events are known to be the ’cause’ of simple things like computer glitches, errors, and other technical problems that can cause losses.