The US will go to the polls on the 8th November to decide who will be their next president. As a foreigner looking on, it is a political event that holds a lot of fascination and interest for me. This is especially true when deciding how to trade the US elections.
As traders we are trained to always view these events in the context of how they may have an impact on the markets; and in particular, the prices of the major currencies. The reality is that although this election is certainly different to most of the others I have ever seen, it will essentially have the same type of impact on the markets.
When deciding on how to trade the US elections, we need to imagine the market as a person. We can then imagine what that person would be thinking and feeling about this election and the candidates involved.
After trading with the market for over a decade, I have a very good feeling for what it will be thinking and feeling about any particular type of event.
If you are new to trading or even just working with the fundamental side of things, remember that the market’s primary focus is always something called ‘certainty’. The more certain the next 6 months are then the happier the market is. Of course, a lot of uncertainty makes the market panic.
So Which Candidate Does The Market Prefer?
When evaluating how to trade the US elections, consider this: From a purely professional perspective, Donald Trump is a totally unknown entity. You never know what he will say next and you are never quite sure how he will react to something that goes against him or his agenda.
The markets definitely do not want someone like him to get into power.
To be fair to Trump, he does say things that the market could potentially like. He has said, for example, that he will end and start to repeal the nonsensical Dodd Frank regulation that has negatively impacted our very own currency trading industry. This would potentially open up the financial industry and make it much easier to do business, which is always good.
But his perceived unpredictability is the main issue that leaves the market unsure of what might happen next should he get into power.
Hilary Clinton, on the other hand, is the perfect candidate for the market. The reason for this is because we can be fairly sure that exactly nothing will change if she gets into power.
It is highly likely to be another 4 years of the same old stuff.
This might not be great if you are a normal everyday American. But for the market, this is the exact type of certainty it loves.
Throughout the election process, the general consensus has been that Hilary is the favourite. And that there is no way that Trump will actually win.
This will probably continue up until voting begins (despite the polls). And this is where the opportunity lies for us as traders assessing how to trade the US elections.
How to Trade the US Elections: My View
Just like you, I have been evaluating how to trade the US elections. The big money is in the eventuality of Trump winning. If this happens the markets will definitely react and probably overreact. This gives us a great opportunity to get involved and make a profit from these moves.
From a currency perspective, we could look at the USD. However, the picture on this is slightly clouded by the fact that the Fed are in the middle of a rate hiking cycle.
Another option is the Japanese Yen. This is the traditional safe haven currency. If the markets start to panic and worry about an incoming Trump government, investors and traders could look to flock into the JPY. At least in the short-term.
Buying the JPY could be a great trade, especially in the hours that follow the election result. Combining this with a currency that is currently weak would be a great move.
Another slightly riskier move could be to trade the MXN. In recent weeks this has become the go-to currency to trade when there is any news that signifies Trump might have an advantage.
This stems from the fact that he has clearly stated intentions that might not sit well for Mexico. So the common assumption is that if Trump wins, the USDMXN will boom in the immediate aftermath.
To be quite honest, this is probably where the most money will be made and is definitely worth a look. But, of course, there are risks to this trade. The main one is that it can be a volatile pair and move heavily in a short space of time. This makes managing risk a tricky business. But the rewards match the risk so could definitely be worth a play.
I will have the chart up and depending on how the JPY pairs are moving, might try and get into a position, should things start to look like a Trump victory.
I have never actually watched a US election live. So I can only comment based on how elections and referendums work in the UK. If the US format is the same, we need to be looking out for the key swing states to go Trump’s way. Florida seems to be a key state, and if he loses it then it could well be game over. If he wins this then the chances of him becoming president get stronger. The market knows this.
So if you are trading it, look out for the Florida results. If the results indicate a Trump victory then this could be a decent time to start taking some positions.
What If Hilary Wins?
Well, as we have already covered, not a lot will change if Hilary wins. It is possible that this could give a boost to the USD.
The currency is already solid due to the Fed. If the markets had the added stability of a Clinton government, then this could send the currency at least a little higher in an immediate reaction.
It is unlikely that there would be fireworks or huge moves with a Clinton victory. Partly because this outcome is all but priced in already, or at least it will be by the time polling closes. So don’t try and trade for huge moves in this scenario. Rather, aim to take smaller bites as the markets initially react.
I will be staying up to trade this event. The sentiment of the American people is such that an upset could definitely be on the cards.
For example, mailing ballots saw a record number of votes cast and there are expected to be more people voting than ever before. This is always a sign that lots of people who normally don’t vote because they feel all candidates are just the same, could be about to make their voices heard. This could be bad news for Clinton.
Whatever your opinion and whoever you are voting for (If you’re in the US) I really do feel that this has a ‘Brexit’ feel about it. That is enough to keep me up; with my finger on the trigger as the results of the vote start filtering through!
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