But another currency may be worth paying attention to as the election results roll in: the Japanese yen, which is, generally speaking, one of the go-to safe-haven assets investors pour into during times of uncertainty.
As things stand right now, the market sees Hillary Clinton as a known player whose policies are expected to be largely a continuation of the Obama administration. Trump and his economic positions, however, are less predictable and do not always follow party orthodoxy. And so, he is perceived as more of a “political risk.”
“Since October, USD/JPY and share prices have risen when polls suggest a Clinton win is more likely and fallen when support for Trump rebounds,” wrote Taisuke Tanaka, strategist at Deutsche Bank, in a note.
“Initially, the reaction of USD/JPY and share prices is likely to follow this preelection pattern until there is some certainty about the election outcome,” he argued. “However, we think a Clinton victory should not be necessarily viewed as USD/JPY-bullish, only for a trigger to unwind USD/JPY shorts.”
Most recently, the dollar strengthened against the yen in Asian trade on Monday after the FBI said a review of newly discovered emails did not change the agency’s conclusion that no charges were warranted in the case of Clinton’s use of a private email server.
In light of that, Tanaka presented different scenarios and what it could mean for the yen:
- Clinton victory, Republican house, Republican/Democratic senate. Whichever party wins the senate, these scenarios “would cast doubt on the sustainability of USD/JPY’s uptrend and ultimately result in reversion to a fundamentals-driven market,” he writes. Given that the recent announcement from the FBI already saw the dollar jump against the yen, “further upside leeway [could be] limited.”
- Trump victory, Republican House, Republican/Democratic Senate.“We would first focus on whether USD/JPY’s initial reaction to risk-off shock from Trump’s victory could make it drop to 100 or lower. A deep decline could result in a greater sales order to cap around the 100 mark,” he wrote. Bolder fiscal package expectations could lead to some “steadiness,” he continued, “however, from a medium-term perspective, we also see the possibility of USD/JPY falling below 100 before the impact of a Trump administration’s fiscal policies would begin to feed through in a few years later.”
For what it’s worth, the yen rocketed against the dollar after the last major political risk event in developed markets: The Brexit referendum, when Britons voted to leave the EU back in June. The currency surged by as much as 15.2% against the greenback shortly after several British news services called the vote. Relatedly, the Nikkei dropped by about 8% in the same time frame.
Interestingly, the yen’s not the only safe-haven asset singled out by investors this time around. Gary Shilling, the president of A. Gary Shilling & Co. and the founder of Merrill Lynch’s economics department in the 1980s, recently told Business Insider’s Akin Oyedele that although a Trump presidency might be negative for stocks, he would be “very positive” for the dollar and Treasurys.
And Capital Economics’ commodities team, headed by Julian Jessop, expressed a similar idea, arguing that “if Donald Trump were to win, we would expect the prices of most commodities to fall. The exception would be gold,” which is the so-called “end-of-the-world” trade.
But, overall, markets are bracing for volatility in the immediate aftermath of the election.
The yen was weaker by 0.6% at 104.5250 per dollar as of 1:51 p.m. ET.