US Elections: Forget FOMC, it’s the debates that matter - Nomura

Bilal Hafeez, Research Analyst at Nomura, suggests that apart from the recently concluded FOMC, the bigger market event surely has to be Monday’s first Presidential debate between Democrat nominee Hilary Clinton and Republican nominee Donald Trump.

Key Quotes

“The lead that Clinton established after the Democrat convention has narrowed sharply, and leading election pundits are assigning a roughly 45% chance of a Trump victory.

The debates could see that lead narrow further. Clinton’s health issues, recent bomb attacks in New York, and Trump’s unpredictable style could all come to the fore in the debates. There will be three debates in total: this Monday, September 26; Sunday, October 9 and Wednesday, October 19. They will all start at 9pm EST (2am + 1 day BST). The topics for the first debate have been released and will focus on “achieving prosperity,” “securing America,” and “America’s direction.” Additional topics could be included based on news developments. The debate will be divided into six segments of 15 minutes on each topic. The moderator will open each segment with a question, after which each candidate will have two minutes to respond. Then they can respond to each other.

While the Mexican peso has fallen over 8% in the past two weeks in response to the increasing chance of a Trump victory, other markets appear not to have reacted so far. One way of measuring market concern around US elections is to look at the FX implied volatility curve. If the curve is heavily inverted, such that shorter-term volatility is higher than longer-term volatility, then it suggests that markets could be expecting some kind of shock in the months ahead. The USD/MXN volatility curve is currently its most inverted since the 2008 financial crisis, suggesting the Mexican markets are concerned.

Looking at the top ten trade partners of the US, we find that the Japanese yen, Canadian dollar, and Taiwan dollar curves are also inverted, though not at extremes. The rest are close to flat or in the case of the Chinese yuan and Indian rupee pointed in the other direction. This suggests that significant scope exists for these markets to price in the “Trump” factor either through their volatility curves inverting or their spot exchange rates experiencing sharp moves.”