U.S. election result took market participants by surprise as Donald Trump’s election was not being forecasted by pollsters. Nevertheless, like in the case of Brexit, if it is not forecasted doesn’t mean it can’t happen.
What is more surprising than the Trump’s election is the market reaction! After an initial flight to safety that has been seen in the S&P500 and DJIA moving limit down, and the JPY and CHF soaring, things changed dramatically.
At the moment of this writing, the equity markets are sitting on all-time highs, with the DJIA printing almost 19K in an amazing run higher. As a result, the USDjPY pair followed suit and now trades steady above the 108 mark, while the USDCHF reached parity. What was the reason for such a nasty reverse?
Firstly, Trump’s policies are being viewed as protectionist ones and this leads to the US dollar strength across the board, and especially against the Euro. While on the bigger picture such policies should favor a lower US dollar, for the time being, it is being viewed as a positive until a clear plan is unveiled by the new team in charge with the White House.
Secondly, at least when it comes to the equity markets, they were ranging for quite some time now and a Clinton win would have prolonged the same conditions moving forward. If anything, Trump’s policies are being viewed as inflationary, therefore the Fed being pressured to hike rates more aggressively in case inflation confirmed. Hence, the US dollar moved higher across the board.
Last but not least, the big surprise came from the USDCAD pair. If anything, this one traded totally different when compared with other pairs. On the initial EURUSD reaction to the 1.13 level on the election night, the USDCAD moved higher as well, in an almost directly correlated manner.
However, by the time the EURUSD started its descent of almost six hundred pips in the following three trading days, not only that the USDCAD didn’t move in the same direction, but it rose. It is being said that the USDCAD is the one currency pair that has the ability to lead the market. Indeed, in this case, the initial USDCAD reaction proved to be the right one.
Moving forward for the rest of the week, we’ll have plenty of economic data in front of us, with both the CPI and PPI being released in the United States and Yellen speaking on Thursday. If anything, volatility should remain elevated, but the focus should remain on the election result rather than on the economic news to be released.
Markets need to digest the new reality and until that is being behind us, nothing else matters.