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Mr. Market, Wrong Again: Trump Wins US Presidency

Mr. Market, Wrong Again: Trump Wins US Presidency

2016-11-09 12:30:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Initial reaction to Trump victory was in line with out expectations based on prior observations: good for Gold and the Japanese Yen; bad for the US Dollar and equities.

- However, traders searching for a silver lining may have found one, which is why US yields are running higher and the US Dollar is making up ground quickly as we turn towards the US session.

- Don't think the election results were a surprise? Check out our preview which included snapshots of aggregate polling averages and betting markets.

Join me today at 10:00 EDT/15:00 GMT to discuss the impact of the US election on FX markets.

The official tallies are in: Donald J. Trump will be the next President of the United States. Much like Brexit, which was also widely dismissed as a non-event, will be a fundamental gamechanger to the post-World War II liberal world order. American-led globalization may be dead; TPP, TTIP, and TISA are dead on arrival. It’s still early, but it’s important to understand and appreciate the magnitude of the event for FX markets specifically, not just the global economy: Fed funds futures have all but solidified expectations for a December 2016 rate hike.

While there was a sharp move across assets last night - very much in line with what we've observed previously, that good new for Trump also meant good news for Gold and the Japanese Yen, and bad news for the US Dollar and equities - let's not overreact. Considering what we're seeing today, it appears that the sheer uncertainty of some of the policies of a President Trump is mattering more than an actual assessment of the potential shifts in policies forthcoming.

Consider what has happened in US Treasuries - the long-end of the curve saw its yield turn positive shortly after it became clear Trump would be the next POTUS. While in the short-term, it may be bad for the US Dollar that the Fed doesn't hike rates, in the medium- or longer-term, the potential policies that Trump will bring along will absolutely necessitate higher interest rates: the combination of tax cuts and aggressive fiscal stimulus should prove to be flammable for inflation expectations.

Obviously, this is a complicated, nuanced issue that will take some time for markets to work through and figure out what the most likely course of action is going forward; uncertainty will stoke volatility and more difficult trading conditions. While this may be a tempting environment to trade in due to the volatility, it’s incredibly important to understand and appreciate the magnitude and potential fallout of this event. Individual position risk should be kept low – minimal leverage used – and risk management needs to be highly active, if you’re going to trade whatsoever.

See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, AUD/USD, USD/JPY, and Crude Oil.

Read more: US Elections Preview and Timeline: When Will States Report Results?

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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