A Currency Trade On A Trump Win

Investors across the world are waking up to the new reality that President Elect Donald Trump will succeed President Barack Obama.

Once it became apparent that Trump secured the victory, the futures market tumbled and many currency pairs saw heavy activity. Precious metals, including gold, also rose, while industrial metal and oils tumbled.

Currency Trades

Hans Redeker of Morgan Stanley commented in a research report early Wednesday morning that the initial reaction across the various asset classes reflects the uncertainty surrounding a Trump presidency.

"President Trump supported by a Republican House and Senate is
likely to turn the monetary/fiscal mix around," the analyst wrote. "The US's fiscal approach is likely to become more expansionary, which should push the nominal US yield curve into steeper territory, followed in the longer run by higher real rates."

As a currency strategist, Redeker argued that the results of the election will result in near-term weakness in the U.S. dollar against low-yielding currencies, but any dip should be regarded as a long-term buying opportunity.

The analyst's preferred trading strategy is to buy the USD/JPY (US dollar Japanese yen pair) especially as USD/JPY heads back to the 100 handle as the yen is viewed as a safe haven.

Redeker suggested investors buy the dip in the USD/JPY through the option market and ride out the short-term volatility.

Another recommended trade is the EUR/JPY (euro/Japanese yen pair).

Mexican Peso

The USD/MXN (U.S. dollar Mexican peso pair) gained around 10 percent, which is close to the analyst's suggested levels of 21. Redeker stated that the next step to look out for is how Mexico's central bank will react during a scheduled press conference at 1 p.m. London time.

"We believe the focus will be on liquidity, with the central bank likely to provide USD by selling reserves and possibly announcing a swap line with the Fed," Redeker noted.