Market gyrates on Trump presidency prospect

A majority of Americans has voted in favour of Trump. Now its up to markets to react. A few takeaways from this shocking turn of events, in which the entire world was taken by surprise.

•  Polls were terribly, terribly wrong – watch the story in the coming days as to how this happened and we should all know now that we shouldn’t trust future polls – here we are thinking especially of European elections next year/Italian referendum in early December, etc.  

• Policy is a huge uncertainty. Nominally, Trump does have both houses of Congress after this election, which could mean huge new policy initiatives. But given that some within his own party were explicitly against his candidacy, the route to forceful policy is uncertain – save that Obamacare is likely history (to be replaced by what, however), Yellen’s time at the Fed ends January 31, 2018, and infrastructure and tax deal highly likely – the last of these likely positive for US growth in near term. 

 The immediate market reaction to what has unfolded and the moves from here:

• The kneejerk reaction was precisely along the lines we (and the consensus, to be honest) would have expected, with the safe havens rising sharply against the USD, especially the JPY, while the EM’s and risk-correlated currencies, led by MXN, tumbled. Because it was consensus that this would happen, this is perhaps why these same trades are unwinding so quickly in the wake of the actual, shocking outcome – that we wouldn’t have expected to materialise so quickly. 

• Again, most interesting thing has been the speed with which the initial reaction has at least partially and significantly unwound. If we see the close of trading today more or less entirely erasing the reaction, we likely have our top in uncertainty for now and we can return to our longer term preference for USD longs, JPY and EUR shorts and more. 

FOMC hike likelihood will be only data dependent if the markets avoid a meltdown here – i.e., odds are bouncing back quickly together with general sentiment. Doesn’t take a genius to draw a connection between ZIRP (zero interest rate policy) and QE and this Trump win, and the Fed likely wants to extract itself from its political liability for what has unfolded here.

 Plenty more to come in the days – and do note some of the G10 comments below – especially for GBP.

 In the hours after the initial suspicion of a Trump win became a reality and USDJPY spiked lower, the pair has recovered smartly and if we end today back into the prior week’s trading range, we may already call a bottom for now. Certainly, given the bounce back in US yields (was this on Trump’s strong promise on infrastructure building at his acceptance speech, in addition to his known interest in tax cuts?) the side of least resistance may already be higher again – watching the 105.00/50 area for breakout interest higher if we remain above the Ichimoku cloud (approx. 103.00 at present).

G-10 rundown, minimalist edition

USD – bouncing back handsomely – we may have seen the low if EURUSD can close today below 1.1100-ish and above 103.00 inUSDJPY.

EUR – safe havens fading again – EURUSD spike higher may already be done and dusted. Longer term, does the market start to think Brexit->Trump->EU skeptics win?

CHF – if US yields continue back higher, USDCHF could rally hard – already miles away from day’s lows and back into prior trading range as of this writing.

GBP – liking GBP on the theme that UK is not alone with Brexit – seeing some interesting action in EURGBP lower that could lead to more given our comments under EUR above.

AUD – middle of the pack – risk bounceback supportive but can AUD really outperform USD if USD picking up steam again? Watching that pesky 0.7700/50 area, but die may already be cast in favour of bears if we close near lows today.

CAD – similar as For AUD above, and interesting to see lack of fear in MXN after tremendous spike – perhaps the protectionist fears are the most overrated by market as they face the toughest slog through Congress relative to other Trump measures?

NZD – RBNZ tonight – still like the idea of NZDUSD downside, but let’s see how market reacts to bank’s message. 

SEK – EURSEK traded well above 10.00 and then saw spike reversal – is this the pattern reversal indicating a major top. Euro-skepticism may see preference for SEK from here.

NOK – EURNOK through important resistance, but has now reversed – so keeping the 9.10/15 zone as the pivot area relative to daily closes. Oil direction important.

John J Hardy is head of FX strategy at Saxo Bank