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How U.S. election results could affect currency markets

FX Market Analyst Simon Harvey joins Yahoo Finance to break down why the U.S. dollar saw swings on election night and discuss how the U.S. election outcome could impact currency markets.

Video Transcript

MYLES UDLAND: Let's turn our attention now to a part of the market that we have not touched on all too much over the last 90 minutes or so. And that's what's been happening in the currency space. And for more on that, we're joined now by Simon Harvey. He's an FX Market Analyst over at Monex. We're also joined by Yahoo Finance's Brian Cheung.

So Simon, let's just start with, I guess, the major moves we've seen in the last 12 hours and the magnitude of those, I suppose, relative to what your expectations were, how investors seemed positioned heading into this event.

SIMON HARVEY: Thank you for having me. And I think it's a very apt time for Julie to sit there and actually giggle at the idea of us not looking too much at polls going forward. Because it's made a very long night just for everyone in the market, not just in the FX space. And if we're going to speak about how currency markets have been playing it, they also got tied up on this idea that they were front running this kind of blue wave going into the election. And we're almost caught wrong sided by it.

The dollar has been trading very mixed throughout the session. It was caught up in this blue wave idea that was kind of a very broad risk on environment. Currencies in the G10 and emerging markets were really enjoying this idea that there's going to be a big fiscal stimulus package coming through in the US. Global growth outlook is going to take a bump higher.

And all of a sudden, you know, everything's going to be quite nice and plain sailing. There is not going to be the idea of a constitutional crisis in the US. And implied vol started to take a bit of a dive overnight in option markets for this exact reason.

Then, all of a sudden, we had Florida. And this is where everything started to change, where the Florida result was-- it was kind of the catalyst of the switch. And then we saw it switch over into how Texas played out. And this really impacted how the dollar, then, started to trade. We didn't exactly see the dollar benefit from risk haven flows in this idea that the election's actually going to be tighter.

But we actually saw more of a reversal of this blue sweep narrative that was driving dollar weakness prior, so much so FX markets resets. And then that's how we kind of started this morning session. And ever since, we've been toying with the idea of, is it going to be a Biden presidency? And is fiscal stimulus going to be blocked by a GOP Senate? Everything's tight. Everything is to play for. In FX markets, everything is actually trading quite mixed and quite flat against the dollar at the moment.

BRIAN CHEUNG: Simon, Brian Cheung here. Great to speak with you. What was really interesting to watch last night, especially as you mentioned the changing developments in Florida last night was really what was happening in the UN market, offshore UN, in addition to the Mexican peso. It looked like they were really-- the US dollar getting a lot of steam against those currencies, as it may have been the possibility, at least, that markets are pricing in of a Trump victory.

A lot of those gains now being reversed with the dollar now losing some steam against both of those currencies respectively. What do you think was to glean from those market actions and the sensitivity broadly in those markets as these kinds of election results continue to pour in?

SIMON HARVEY: Yeah, I think what's quite a clear decisive area within currency markets is the dollar is trading very mixed in the G10 space. It's struggling to find generally broad direction, whether it's going to be kind of a cyclical positive for global growth. You know, is this not worse? It's not filtering into high euro dollar.

But it's more clean cut in emerging markets. As you say, the idea of a Trump victory coming back into scope, it really started to nail Chinese yuan and Mexican peso. Trade relations starts to become a kind of a problem again. These aren't necessarily completely negated by a Biden presidency. So these aren't exactly-- you know, we're not going to start talking about massive rises in the Mexican peso and the yuan either.

But the idea of this kind of, are we going back to an uncertain trade outlook at a time where the global economic outlook is actually very sensitive as well, this didn't kind of bode favorably for emerging markets. And it set the tone on top of that that we were actually going to start seeing kind of prolonged uncertainty, no fiscal stimulus from the world's largest economy in the interim.

And markets withing the emerging markets where currencies in the emerging markets space will continue having to look to China for growth in the interim. Because the reason why emerging markets are actually very sensitive to this US political outcome is because fiscal policy is highly constrained in areas like South Africa, in areas like India. We're not seeing double-digit fiscal deficits like we're seeing in the G10 space. So it needs to find growth externally.

And the idea that you're not getting this big fiscal stimulus pump to this global growth outlook from the US, then that kind of hampered the emerging markets space. We're starting to see that reverse somewhat now because we potentially will see the initial COVID stimulus relief package come through under Biden. But we're not also seeing this massive risk on rally from the idea that we're going to get kind of prolonged fiscal support from the US.

BRIAN SOZZI: Simon, we have a lot of big name multi-national CEOs that watch this program every day. What's their top trade? What should they be telling their trading desks to help them hedge moves in the US dollar over the next few days?

SIMON HARVEY: I think the general kind of takeaway points over this is that nothing should be taken as a given. You know, I feel weird saying it so late into 2020 that we should actually start to hedge exposure because, you know, 2020 is still just one thing. And I think, you know, we don't know what's coming. And I've taken so many calls from journalists prior to the election, saying to me, it's a done deal. You know, we're seeing polls be so heavily pointing in one direction.

And I just had to remind them, you know, it's not 2021 yet. Don't take this stuff for granted. The volatility is still there. The uncertainty is still there. Given how close the kind of presidential votes are actually panning out in these kind of democratic world states, we're most likely going to see recounts being kind of suggested there. We're likely going to see court battles over the next few weeks.

This, again, even if markets are going to take this presidential outcome as a given, it isn't. And then you got the idea of, is the Senate race actually going to have to spill over into this January runoff? And this, again, has massive repercussions for not just that COVID relief fiscal bill, but the supplementary fiscal relief bill under the Biden presidency or under the Trump presidency. And, you know, we just don't know how this is going to pan out at this moment in time.

MYLES UDLAND: All right, Simon Harvey, FX Market Analyst with Monex. Simon, thanks so much for joining the program. Great to get your thoughts.

SIMON HARVEY: Thank you.