Don’t worry this article is not about who should win or lose Tuesday’s U.S. Presidential Election.
Instead, it is about how the U.S. dollar could perform in the next few days and after the election.
This is one of the most dramatic U.S. Presidential elections in history and last week we got a taste of how the financial markets could react if Donald Trump stole the election.
On Tuesday November 1st, a poll from ABC News/Washington Post showed Trump leading Clinton by a single percentage point for the first time in nearly 6 months.
YES, this is within the margin of error and YES the polls change day by day, but the U.S. dollar collapsed, stocks plunged and gold prices soared on the day this poll was released.
In the following chart, we’ve overlaid the U.S. Dollar Index (line) with Real Clear Politics’ 2016 Presidential Poll Average Value for Hillary Clinton (white line). Hopefully you can see the strong correlation and notice how the polls have been leading the dollar since the summer. When Clinton’s popularity increases it generally corresponds with a strengthening U.S. dollar and when it falls (like it has been recently), the dollar crashes in response.
But the magnitude of the decline in the dollar index is small compared to some of the moves in other major currencies. On November 1st, when that poll we just mentioned was released, DXY dropped less than 1%. On that very same day the Mexican Peso dropped 1.75% and the Swiss Franc soared 1.4%.
Along these lines our second chart shows the strong positive correlation between the U.S. dollar / Mexican Peso currency pair (yellow line) and Real Clear Politics’ 2016 Presidential Poll Average Value for Donald Trump (white line). When Trump’s popularity rises, USD/MXN soars so if the polls remain tight, USD/MXN could break 20.
As you think about how you will be trading before and after the U.S. Presidential Election, it is important to understand the different scenarios and how the major currencies will perform. The euro, Swiss Franc and Japanese Yen will be big winners if Donald Trump becomes the next President of the United States on November 8th.
The U.S. dollar and Mexican Peso will be major losers. If Clinton wins by a solid margin, which is what is needed so the U.S. dollar will rally in relief, pushing all other currencies lower in the process. In this scenario, the biggest winner will be the U.S. dollar and Mexican peso and the biggest losers should be the Japanese Yen, Swiss Franc and to some degree the euro.
On a percentage basis, we expect greater volatility in financial assets (currencies, equities and commodities) if Trump becomes President over Clinton.
Of course, there’s one more outcome to consider and it’s the most realistic – if Clinton or Trump wins by a narrow margin and one side calls for a recount, the uncertainty that it creates will hurt the U.S. dollar and lead to ongoing risk aversion.
Until next time,
Ms. Kathy Lien is the Managing Director and Founding Partner of BKForex’s strategies and creator of the new course The ULTIMATE Forex Trading Course produced in conjunction with Weiss Educational Services.Kathy, a leading currency and Forex expert, started the #1 Forex news site DailyFX.com, is a regular contributor to CNBC Squawk Box and is a former host of CNBC’s Forex show, Money in Motion. She is also an internationally-published author of the best-selling book, “Day Trading and Swing Trading the Currency Market” (now in its third edition) and “The Little Book of Currency Trading.”