The United States 2016 election is quickly drawing to a close and yet, topics and issues seem to be more muddled than ever before. This will impact the stock markets just as much as it will inevitably affect the voters themselves. However, it appears as if the gap between Donald Trump and Hillary Clinton is narrowing significantly. Such observations have already sent ripples across the Forex trading community. What can we expect between now and 8 November and are there any ways to hedge against what may certainly prove to be a volatile trading environment? Investors of all sizes need to carefully analyse these two questions.
What are the Markets Saying?
It is a mistake to believe that major indices such as the Dow Jones, the S&P 500 and the NASDAQ are completely separated from the sentiment of the average investor. On the contrary, domestic fears are often transposed to such mediums. In trading on 2 November, we saw the DJIA slide 0.17 per cent and the NASDAQ fall 0.32 per cent.
The reason that we have seen these movements is the the fact that Trump seems to be gaining ground in “swing” states; a very real concern for the democratic party. Although most still believe that Clinton will take the election, the fact that Donald Trump appears to be courting a wider base has voters and Forex traders alike very concerned. Why is this the case?
Instability on the Horizon?
We have already seen the currency markets react negatively to Trump in the past. The most recent example can be seen in the anticipation of the last presidential debate. While there is no doubt that Donald Trump leaves an unsettled feeling in the stomachs of many around the world, we need to take a look at these latest events from a purely economic perspective.
For investors, the main issue is not necessarily what Donald Trump has said. It is what he has FAILED to say. This is in particular reference to a lack of any real concrete response to domestic economic questions as well as his commitment to international partners. The fact that he plans to entirely scrap important trade deals such as NAFTA further cements the fear of many investors. They are concerned that the value of the dollar will quickly enter into a downward spiral if Trump is elected in less than one week.
What to Expect
There is no reason to believe that the Forex markets will stabilise between now and 8 November. If the recent past can be used as a financial “thermostat”, they will likely become even more volatile (if not on a slightly bearish tone). This is not to say that only doom and gloom will dominate, but rather that most investors will be watching and waiting to see what other bombshells the week ahead has to offer.
As international markets tighten their proverbial belts, Forex traders are likely to embrace an approach that centres around staying away from more liquid positions. Also, we should never forget that the average currency investor is not necessarily an expert in the field of American politics. It only stands to reason that such conservative approaches should dominate.
How to Respond
There is a very real reason why the word “should” was underscored in the last paragraph. Most analysts feel that this election is unprecedented in recent times (at least the last four decades). Therefore, viably predicting any type of outcome is exceedingly difficult. With damaging statements and accusations emerging from both ends, how should Forex traders react?
First and foremost, the markets will go on. Forex trades will occur immediately following Super Tuesday and the world will not come to an end. If anything, we should expect to witness a knee-jerk reaction immediately after the results are released. This is why it is critical to stay ahead of the game with the help of the tools offered at CMC Markets. Some traders could very well capitalise on short-term fluctuations while others may instead sit back and observe. Either way, there is no doubt that we are in for an interesting week.