What to expect if Trump wins the election:

With a week to go before the US election at the time of writing, asset markets beyond the MXN have finally started to price in volatility around the result. This process has clearly been helped by the apparent tightening in the polls resulting from Friday’s news that the FBI investigation into Clinton emails is open again. For example, even the VIX Index has pushed towards four-month highs around the 20 level despite still-low realised volatility in the S&P 500.

1. EUR, CHF and JPY strength vs. USD as funding currencies find a bid in volatile markets, along with associated fears of major central banks and sovereign wealth funds divesting from Treasuries as a ‘safe–haven’. A reason for this would be fear of losses associated with much greater Treasury supply or much higher US inflation levels.

2. Uncertainty for the CNY, KRW and other Asian currencies that represent economies buoyed by current account surpluses based to a large extent on exports to the US, but which could come under the microscope as potential mercantilists. While policies such as tariffs on Chinese exports would hurt CNY, some might also push the idea that China will feel compelled to stop its current losing trend to take it out of the limelight.

3. A risk-off tone to high carry, potentially ‘toxic’ currencies like BRL and RUB where positions are stretched

4. A sharp sell-off for the CAD which until now has dramatically outperformed MXN and maintained relative stability vs. USD despite also representing a NAFTA member with large exposures to the US. This would also see CAD underperform other G10 commodity currencies such AUD and NOK that could retain a bid as diversification plays with relatively high nominal yields and strong credit ratings.

5. A wider bid for traditional ‘safe-havens’. We note that EURCHF closed below 1.0800 yesterday for the first time since the immediate aftermath of the Brexit vote in June. If the SNB is unwilling to aggressively defend the pair the path of least resistance looks lower for now.

Of course, once markets settle down in a Trump-win scenario, some of these knee-jerk reactions could reverse. For example, RUB may recover quickly if Russia is judged to be a longer-term beneficiary of prospective shifts in US foreign policy. Or CAD may ultimately benefit if a Trump administration were to become more liberal on energy pipelines from Canada. But with FX markets likely to be affected by poor liquidity in the immediate aftermath of a Trump–win scenario, as is the case with the MXN market already, we would take our time and not rush to fade the knee-jerk moves.