US Presidential Election Trade: A Punt on the EUR/USD Exchange Rate Could be a Risk-Free Bet
Noises coming from some of the foreign exchange market's most esteemed analysts would appear to suggest betting on the EUR/USD around the US presidential election is almost a risk-free option.
It may not be a big mover like USD/MXN, but the EUR/USD pair might provide traders with a more secure alternative wager on the outcome of the US presidential election.
A combination of minimal downside risk and optimum upside profit are the characteristics which appear to make this an attractive play.
It is generally accepted that a Clinton victory will not result in much movement whilst a win for Donald Trump would have a much greater impact, with a weakening of the dollar being a major one.
A Trump win would see the Euro appreciate to 1.13 to the Dollar assuming a Republican controlled house of reps and a Democrat Senate, says J P Morgan’s John Normand.
A Clinton win, on the other hand, would see the EUR/USD pair trading at 1.11 – also marginally above their current 1.1050 value, according to Normand
Could you get much better than the ‘win-win’ bet JPM are forecasting?
ING Sees Some Small Risk
Dutch lender ING sees some minimal downside risk for EUR/USD making the bet not quite as attractive for them.
Under a Trump victory, ING Strategist Viraj Patel sees upside potential for EUR/USD to 1.13.
In the case of a Clinton win, on the other hand, he sees EUR/USD declining to 1.09- which given the current rate is 1.1050 would see a 150 point decline - so not completely risk gratis.
Bank of Mitsubishi-Tokyo are on the same page, also seeing a rise to 1.15 in the event of Trump shocking everyone again, and a fall to 1.09 under a Clinton tenancy.
Goldman’s Offer Contrarian Alternative
Goldman Sachs forecast a much deeper decline in EUR/USD attendant on a Clinton win than any of the above, in a complete inversion of the ‘risk free’ bet hypothesis.
“The Dollar has fallen sharply over the past week, as polls have tightened into the upcoming election.
“On a trade-weighted basis versus the majors, the greenback is down more than one percent, a number that understates the decline because the fall in oil prices has weighed on the Canadian Dollar, which has a large weight in our Dollar index,” say Goldman’s.
Recent Dollar weakness has also surpassed what would be expected from rate differentials.
Dollar undervaluation and the higher likelihood of a Clinton win skews risks to actually favouring a deeper move lower from EUR/USD, not a shallow pullback, thus leading Goldman’s to advocate a contrarian play.
“While near-term focus in the market is on potential further declines in the Dollar in the event of a Trump victory, the likelihood of a meaningful Dollar rise in a Clinton win scenario is rising. In particular, based on the make-up of the Dollar sell-off over the past 10 days, we think the greenback could recover the most ground against the Euro and the Yen,” concludes the bank.
Goldman’s do not, however, give any detailed targets in their note.