Clinton victory means higher AUD/JPY and lower EUR/CAD
- The dollar inched lower ahead of voting in the U.S. presidential election on Tuesday, a sign of last-minute nerves over the chances of a victory for Donald Trump. Our baseline outlook, supported by the latest polls, is that the country is heading for four more years of gridlock with a Democratic President, a Republican House and a split Senate.
- On Monday, markets had turned away from the Trump-driven "risk-off" plays that have knocked the dollar in the past week as odds on a victory for Democratic candidate Hillary Clinton hardened, helped by an all-clear in an FBI investigation of her use of personal email while serving as secretary of state.
- A Trump victory would come as a shock, as the market is pricing in less than a 30% chance of that happening. But investors are mindful of the precedent of Britain's referendum on EU membership in June, which confounded the polls by delivering a shock vote for Brexit.
- Following yesterday’s US dollar rally, markets are likely to avoid taking too much risk ahead of the US presidential election result. Hence, we expect relatively tight ranges across the major currency pairs. Clinton victory would likely support the USD in the short term against low-yielding currencies such as the EUR, JPY and CHF. To the extent that risk assets push higher, we believe high-beta currencies such as the AUD and NZD would be better supported while we would anticipate a meaningful outperformance by the CAD. The USD/CAD has been grinding higher since late September despite the odds of a Trump victory have declined. One reason has been the dovish shift by the BoC, which has induced the market to price in some (albeit small) probability of a further rate cut. We think this is largely exaggerated and expect a Clinton win to provide the catalyst for USD/CAD to correct lower.
- We expect that the strongest reaction in case of Clinton victory would be visible in AUD/JPY (rise) and EUR/CAD (fall) pairs.
AUD/JPY: 
EUR/CAD: 
What if Trump wins?
- Victory by Donald Trump in the presidential election would constitute a substantial risk-off event. Of course, equities would be among the hardest-hit assets, suffering across the board. Also emerging markets (particularly Mexico) would be impacted. The core-periphery spread would widen in Europe. In forex and fixed income markets, potential developments are less straightforward. A risk-off event usually results in safe-haven flows, benefitting the USD and US Treasuries. However, since the fate of the US would be in the limelight (during the early phase of his campaign Donald Trump talked about restructuring US debt), there could be some doubt about this. Nevertheless, we think that the most immediate reaction would be lower ProShares Ultra 7-10 Year Treasury (NYSE:UST) yields and the USD up versus emerging markets currencies, but weaker against lower-yielding currencies. However, given uncertainty in respect to the US, many investors would probably move into gold as a hedge, driving the price up a lot.
- As Trump victory is not our baseline scenario we have locked in profit on our long precious metals positions.
XAU/USD: 
Not only presidential election
- It is important to remember that the upcoming election determines not only the next president, but also the balance of power in Congress, as the entire House of Representatives and a third of the Senate are up for grabs. Our baseline outlook, supported by the latest polls, is that the country is heading for four more years of gridlock with a Democratic President, a Republican House and a split Senate. Democratic Representatives are also on track to gather more total votes in the House election than their Republican peers. But due to gerrymandering – the redrawing of district lines – Republicans are still most likely to maintain the majority of seats. This has happened twice over the past twenty years, in 1996 and 2012. In addition, the Senate will most likely be evenly split or slightly tilted in favor of Democrats, as they are on track to win four to five seats from Republicans.