VOLATILITY YET TO SETTLE WITH DOLLAR STRENGTH EBBING SLIGHTLY

The remarkable victory for Donald Trump in the US Presidential election resulted in an incredibly wild ride on financial markets that saw sharp swings first one way then the other. Initial pressure on risk appetite and the dollar turned around into the close, with an incredible rally in sentiment. The driver seems to have been the bond markets which took Trump’s acceptance speech as being a driver of both growth and inflation. This pulled a huge swing higher on the US 10 year Treasury yield and a significant steepening of the yield curve. Just 24 hours after Trump was announced as the President-elect, volatility is still yet to settle down. Will this initial assessment of reaction continue? Today there still seems to be an appetite for safe haven plays as the yen and gold have recovered some of the losses into the close. Furthermore, some of the dollar strength is just ebbing away again this morning and it will be interesting to see where the greenback ends up as the volatility subsides.

WHAT ARE THE MARKET LEVELS TO WATCH FOR THE PRESIDENTIAL ELECTION

As the US goes to the polls markets are consolidating. However this will certainly be the calm before the storm and overnight tonight we could get some significant swings with big volatility across forex and commodities. As the swing states are revealed early on Wednesday morning (UK time) we should get an indication of the victor. However that means volatility is likely to be significant early on, especially if Trump has a few strong early results. Ultimately with Hillary Clinton around 4% ahead in the polls and likely to win, a Clinton victory would be the least volatile outcome for markets. 

DOLLAR LOOKS TO STABILISE AHEAD OF NON-FARM PAYROLLS

After several days of dollar correction, the bulls are starting to build support again which is starting to unwind some of the recent safe haven flows ahead of Non-Farm Payrolls. The need to re-price for a Trump victory has sent market fear soaring in recent days with the VIX volatility closing yesterday at its highest level (at 22) since Brexit. However, whilst equity markets are feeling the concern, it is interesting to see Treasury yields begin to pick up slightly again and the US Trade Weighted Dollar also moving higher. This is helping the dollar to perform better across the forex majors and begin to unwind some of the safe haven flows away from the yen and gold. Today is Non-farm Payrolls and with the Fed still firmly on course for a rate hike in December it would need a drastically disappointing set of labor market data to alter market expectations. With expectation of another middle of the road report and the market more mindful of the impending election, it is possible that this could be one of the lower volatility Non-farm Payrolls Fridays we have seen for a while.

FEARFUL OF A TRUMP VICTORY THE DOLLAR REMAINS UNDER PRESSURE

Markets remain fearful of a Donald Trump victory and the dollar is under pressure. Safe haven assets such as US Treasuries, the Japanese yen and gold are rallying, whilst higher risk plays such as equities are being sold. Moreover though, the dollar is corrective and this is impacting across the forex majors, with even the embattled sterling managing to rally against the greenback. In the past week, the Trade Weighted Dollar Index has dropped from 99.0 to 97.1, which is almost 2.0%. Even the Fed has done little to support the dollar, in spite of there being little change to the expectations of a rate hike. The Federal Reserve quite predictably chose to hold off from increasing the Fed Funds rate, given the proximity to the Presidential election. The FOMC believes the “case for an increase in the federal funds rate has continued to strengthen” but has chosen to “wait for some further evidence of continued progress”. Whilst there was no explicit point towards a December hike, there is little to suggest it will not happen. According to the CME Group FedWatch tool, the probability of a December hike remains above 70%. For now the dollar is running on politics and not economics or fundamentals. Non-farm Payrolls may create some volatility tomorrow but it is Trump’s polling that seems to be key right now.

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