Here's how volatile currency markets could get following the US election

DOUG KANTER / AFP / Getty Images

In around 48 hours we’ll probably have a fairly good idea who’ll be the next US President – and we may even know for sure.

It’s going to spark some massive moves in financial markets, particularly should Republican nominee Donald Trump — the underdog based on most opinion polling — win the race to the White House.

This fact is no better underlined than in the chart below from Barclays foreign exchange research team.

It shows the implied one-day move in individual currencies on election day, based on current options pricing – essentially how far a currency could rise or fall should Clinton or Trump prevail.

Based on the prices being paid for some options, a Trump victory could spark some enormous selling across emerging market currencies, led by the Mexican peso.

As it was produced over the weekend, and doesn’t capture the risk rally seen in Asia on Monday, it’s likely that the skew in market movement for a Trump victory would now be even larger.

“In the immediate aftermath of the elections, we expect a modest relief rally in case of a Clinton victory, versus a pronounced risk-off in case of a Trump victory,” says Barclays.

“The MXN is the most sensitive currency, and we would expect material USDMXN appreciation (towards 22) if the GOP candidate prevails. Other high-beta currencies, particularly from trade-dependent EM economies, such as the KRW, are poised to weaken in this scenario as well.

“On the other hand, traditional safe havens such as the JPY, the CHF and gold would likely rally in the aftermath of a Trump victory.”

Should Clinton prevail, Barclays suggests that the market reaction “would be more muted the days after the event”.

“In the following weeks, however, the composition of Congress, perceptions about the legitimacy and governability of the winner, and the market assessment of the implementability of different policies are likely to be more relevant in driving currencies,” it says.

Aside from showing that the risks to financial market volatility are skewed towards a Trump victory, it also suggests that movements in the Mexican peso-Japanese yen cross (MXN/JPY) will not only be enormous no matter what the outcome, but could also be the truest guide to financial market sentiment before the poll result is known.

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