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 on Trump’s surprising outcome - EconoTimes)
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The U-turn happened with staggering speed. Even during the election night some of Donald Trump’s central demands disappeared from his homepage.
CADJPY vol: CAD is the G10 counterpart of MXN, and it is no surprise that two out of three entries in this shortlist contain CAD-crosses.
CADJPY is by far the most expensive gamma in G10 (see above chart for 1m realized vols running 6-7 % pts. under 1m ATMs), and the poster-child of a high-beta vol ripe for a 2-3 pts. lower repricing should fears of a Trump presidency prove unfounded.
CAD is only 1 sigma cheap and our EM strategists that MXN and TWD are near fair value on their models. Only JPY is an exception where both the premium appears high in spot and vol.
Given this setup and the binary nature of the outcome on Tuesday, the FX market reaction around the event appear binary as well. As a result, we keep direct exposure to this event light. Coming into this week, we were positioned for -
a) Long oil currencies (NOK vs. EUR, CAD vs. GBP) but short non-oil commodity currencies (NZD vs. EUR),
b) The central bank balance sheet constraints limiting additional easing (long CHFJPY, short EURCZK),
c) We uphold longs in USDKRW on CNY weakness.
d) More Brexit-related weakness and Fed hikes and estimates to attract shorts in GBPUSD during December and early 2017.
Longs in oil currencies would likely underperform if there is a Trump outcome as risk sentiment is likely to deteriorate in the initial reaction, as would long CHFJPY as the recent bond market sell-off and the related JPY underperformance retraces, but this would be partially offset by an outperformance in long EURNZD.
