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The US election will continue to dominate the market in the coming week. The tight election demonstrates the market's inability to price tail risk.
The countdown period on election night is very important for investors because the market will revise outcome expectations from time to time. The outcome of the election will become clear sooner if vote counts in key states like Florida, Ohio, North Carolina, Virginia, Georgia and Pennsylvania become clear.
On the contrary, if the elections in these states are close, the results of the election will not be announced until the last minute, and the market volatility on election night will therefore rise.
If Trump wants to win the White House, possible paths include: winning Florida, Ohio, North Carolina, Georgia and Arizona. Therefore, the success of these states can provide clear guidance on the final outcome. The trading strategy is as follows
Scenario 1: Trump won Florida, Ohio, North Carolina, and Georgia, long the Japanese yen and Swiss franc, and short the Canadian dollar
Trump won these states The election will put pressure on market risk appetite, causing the U.S. dollar to fall against the Japanese yen, Swiss franc and euro. The market will reprice the likelihood of Trump's eventual victory. The Canadian and Australian dollars will also be lower as they have not priced in a substantial premium for the risk of a Trump victory. Market risk aversion and volatility will increase ahead of results in several other key states such as Michigan, Colorado, Arizona, Wisconsin, Nevada and New Mexico. Trump needs to win at least Arizona, Nevada and New Mexico to win the election.
Scenario 2: Trump loses Florida, Ohio, North Carolina or Georgia, long the US dollar (except against the Mexican peso and Canadian dollar)
If Trump loses these states, then The odds of winning are almost zero, unless states like Pennsylvania, which are now Democratic, vote for Republicans.
Therefore, if we get this result before the results of other states come out, we can think that Trump lost the election. In this case, we would be long the U.S. dollar (except against the Mexican peso and Canadian dollar) because market volatility will then decrease and the market will price out a Trump victory.
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