Pre-election comment: The US election rests on a knife-edge

The US election rests on a knife-edge as Americans head to the polls, with the outcome now seemingly anyone’s guess. With effectively nothing separating the two candidates in the key swing states, even a minor polling error could result in a big win for either candidate on Wednesday morning. This has made investors reluctant to commit to sizable positions until at least the release of the initial exit polls, out from 5pm Eastern Time (10pm GMT).  

This opens the door to the possibility of some very aggressive swings in markets on election night. We think that a Trump win would be bullish for the US Dollar, particularly under a Republican clean sweep, as investors would immediately price in lower US taxes, higher Federal Reserve rates, greater protectionism and elevated geopolitical risk. Under a Harris victory, moves in currencies would be more contained, although we would likely still see a rather sharp sell-off in the dollar and a relief rally in emerging market currencies, merely on the pricing out of a Trump victory.

A divided Congress would make it difficult for either candidate to force their fiscal proposals through Congress, although Trump would have little trouble delivering on his tariff plans. Under this scenario, we would still see a strong move lower in risk currencies, particularly those in Asia that are closely linked to the Chinese economy, which would come under the biggest strain from Trump’s ‘America First’ policies.