Carlos Danger’s Gift to Investors

“Nothing stranger…
than an election game-changer…
coming from the emails of one Carlos Danger.”

— A tweet in the aftermath of the FBI Bombshell announcement last Friday.

If Samuel Beckett were to write the script for the 2016 election, he couldn’t come up with a more bizarre scenario than what reality has offered us. Both flawed candidates face allegations that could compromise them. And although the polls still give Ms. Clinton the edge, deep down everyone knows that the race is far closer than it appears to be and that election day could be full of surprises.

The markets, in the meantime, are in a state of suspended animation … showing little movement either way. As I noted yesterday on CNBC, no one is liquidating but no one wants to dip their toe in the water until they figure out how the election plays out.

Since currency markets trade 24 hours a day, they will be the first to react to any breaking news. A Trump win is perhaps the easiest scenario to handicap. Mr. Trump has been the wildcard candidate and markets have already shown that they will go into a tailspin because of the unpredictable nature of his personality and policies. The Mexican peso, which has become the unofficial proxy for this election, will no doubt drop hard — perhaps as much as 5% to 7% — as investors adjust to the new reality of “The Wall.”

Currencies will be the first to react to any breaking election news.

A Trump win will no doubt cast a pall on all the economic activity south of the border and will force investors to quickly account for any disruption on global trade. Although the Chinese yuan is a controlled currency, it too may slip by 0.5% to 1.0%.

But the much greater hit will likely come for the Australian dollar, which will suffer from any contraction in demand from China.

Just last night the Reserve Bank of Australia left its benchmark rates unchanged, issuing a relatively sanguine statement as Chinese factory activity increased at its best rate in 2 years.

A Trump victory, however, could send the monetary officials in Sydney scrambling. And they will likely cut rates in December, causing Aussie to lose 3% of its value very quickly.

A Clinton win will have much less dramatic effects as she is the candidate of the status quo and any positive reaction in the currency markets will be mild.

But perhaps the most interesting scenario to consider is the most likely one. What if the race is super close? What if neither side decides to concede? Markets hate uncertainty, but this would be chaos of gargantuan proportions.

Generally, in times of stress, investors run to the safety of the dollar, which tends to be the first stop of flight capital. But next Tuesday, the situation could be very different. Since the source of turmoil would be the United States itself, investors will very likely turn elsewhere — quickly bidding up the Japanese yen and the Swiss franc — which are always seen as safe-haven repositories of last resort in the FX market. Both could rise by as much as 5%, no doubt causing massive problems for both the Japanese and Swiss monetary officials who have been trying to weaken their currencies for months.

In fact, it’s not at all inconceivable to imagine that both Japan and Switzerland could initiate a negative-2% rate on deposits (meaning that at the end of the year, your 1,000 francs will be worth only 980). But investors will still flock to those currencies with all the abandon of teenage girls at a rock concert. In the 2016 election, that would be the perfect ending to a wild and a bizarre year in politics and markets.

Happy Trading,

Boris