Are we looking at a repeat of the dollar melt up in 2016?
As Biden leads in the polls, almost everyone has been talking up the case for a 'blue wave' and what scenarios may take place should that happen.
The straightforward one being "buy everything, sell the dollar" of course, but there are some risks associated with that once the euphoria begins to fade.
Over the past ten months, I grew from thinking Trump would easily win this election to thinking that Biden should have this in the bag, judging by the lead in the polls. But now, I'm less confident of that outcome as we approach the home stretch.
I would still argue that the base case remains for a 'blue wave' but Trump winning once again and stealing this election is not within the realms of being unworldly, if you ask me.
As a trader, it's best to be prepared for all outcomes and eventualities, so what is the trade if we do see another four years of Trump in the White House after next week?
Is it going to be the total opposite of the reaction if we see a 'blue wave' outcome?
The biggest clue that the market has to go on is the 2016 melt up in the dollar, where we saw the greenback smash everything in its wake - especially EM currencies.
In case you forgot, we had USD/JPY going from 101.20 to 118.00 in the span of just over a month and even EUR/USD tumbled from 1.1300 to near 1.0300 in that time.
This time around, I don't think we will see a repeat as convincing a surge in the dollar; going past the initial reaction to the election result that is.
The knee-jerk reaction may still be a rush to the dollar based on the 2016 narrative, alongside four more years of geopolitical uncertainty with the market also not really anticipating the result to be the 'base case' outcome given election pricing.
I would say equities will also rally alongside the dollar on the result as we all know Trump prides himself on the stock market and Biden's tax increases can be cast aside.
If Republicans hold the Senate, that will add to the optimism in stocks as stimulus hopes would be renewed as well.
But the stock market reaction is a pretty straightforward one, all things considered.
Beyond that, the real trade would be to fade any dollar euphoria on a Trump victory.
As the global economic recovery continues to encounter more setbacks and the Fed not going to even consider hiking rates in the next 5 years possibly, fiscal and monetary support is here to stay for a long, long time.
Essentially, we're returning to the pre-election status quo and I don't see how that changes the narrative that the dollar is arguably in the early stages of a multi-year decline.
While equities may still be rocked from time to time on virus jitters and negative economic developments, the big picture is that the dollar is likely to falter as long as the Fed keeps their word in the medium-to-long term.
That should see more flows into EM currencies, with the reflation trade narrative only adding reason for investors to pile more money into gold as well.
If a 'blue wave' is characterised by a "buy everything, sell dollar" reaction (at least in terms of a knee-jerk reaction potentially), then a Trump victory should be characterised by a "buy stocks, then sell dollar" reaction (one which is arguably more straightforward).
