The US 2024 Election playbook: Risk Management and Market Opportunities for Forex Traders

The U.S. presidential election on November 5, 2024, will indubitably exert significant influence across financial markets in the United States, Europe, and the global economic environment. The election’s outcome—whether favoring Republican candidate Donald Trump or Democratic candidate Kamala Harris—will have disparate effects on various asset classes, encompassing equities, currencies, and cryptocurrencies.

Forex traders are bracing for heightened volatility and a potential market upheaval. Wall Street is bracing for the immense preparation needed ahead of an election that could shift policies significantly. According to Bloomberg, trading desks are ready for overnight operations, supported by teams from Hong Kong and Singapore to manage global market responses. They’re poised to monitor and react swiftly to popular ‘Trump trades’ — going long on the dollar and short on bonds — which could be intensified or unwound rapidly. Market participants must approach this event with precision risk management and acute awareness of the financial landscape.

With results set to trickle in overnight, traders are gearing up for a volatile session—adjusting positions, monitoring margins, and likely riding the waves of uncertainty through until sunrise.

U.S. and European Equity Markets

Historically, U.S. equity markets have demonstrated resilience during election cycles, maintaining an upward trend irrespective of which party assumes power. Since 1950, U.S. equities have averaged returns of 9.1% during election years. Nonetheless, the distinct policy agendas of the candidates imply considerable sector-specific volatility.

• Donald Trump: A Trump victory may herald the reimplementation of tariff policies, which would influence global trade dynamics and potentially induce short-term volatility, particularly in sectors sensitive to trade regulation.
• Kamala Harris: In contrast, a Harris administration might emphasize regulatory reforms and fiscal policies aimed at promoting economic inclusivity, particularly benefitting sectors such as renewable energy and technology, which may undergo shifts based on anticipated regulatory adjustments.

European markets are likewise expected to react to alterations in U.S. trade and foreign policies. A Trump win could generate uncertainties regarding tariffs and trade agreements, thereby impacting European exporters. Conversely, a Harris victory may lead to more predictable trade relations, providing potential tailwinds for European equities.

USD and EUR Impact

The U.S. dollar (USD) and the euro (EUR) are set to exhibit marked fluctuations in response to the election outcome:

• USD: A Trump victory could provide upward momentum for the dollar, driven by expectations of fiscal stimulus and protective tariffs, potentially leading to dollar appreciation. Conversely, a Harris win may prompt dollar depreciation if markets anticipate an increase in government spending and a dovish fiscal stance.
• EUR: Movements in the euro will largely mirror fluctuations in the dollar’s strength. A stronger dollar is likely to weaken the euro, whereas a weaker dollar would enable the euro to gain ground. Additionally, European Central Bank (ECB) policy responses and regional economic conditions will further define the euro’s trajectory.

Cryptocurrencies

The cryptocurrency market, particularly Bitcoin, has displayed considerable sensitivity to political shifts:

• Bitcoin: Bitcoin’s price has surged to nearly its all-time high of $73,500, reflecting a 63% increase year-to-date and highlighting a robust recovery from the crypto market crash of 2022. A Trump win could further boost Bitcoin, given his inclination toward deregulation and policies favorable to digital assets. Conversely, a Harris administration may pursue more stringent regulatory oversight, increasing market volatility and potentially affecting Bitcoin’s price trajectory.

Market Outlook

As the election approaches, traders are bracing for the market ramifications of either candidate’s win. While prediction markets have largely positioned for a Trump victory, recent polling from CNN indicates a 48% likelihood for Harris compared to 47% for Trump—suggesting the possibility of a highly contested race. Such a scenario is precisely what traders fear, as it would prolong uncertainty and amplify risk.

A Harris victory could potentially alleviate pressure on U.S. treasuries and global markets, leading to a contraction in risk premiums. Conversely, a Trump win may unsettle the euro and European equities amid renewed threats of tariffs. Despite the recent rally in the Stoxx 600, Trump’s protectionist tendencies could weigh heavily on European stocks if they resurface post-election.

Volatility in equity options has surged in recent weeks, signaling that investors are positioning defensively for post-election market swings, even as equities have remained relatively stable. The outcome of the election will determine the trajectory of an unexpectedly resilient U.S. economy. Economists highlight that Trump’s proposed policies—such as tax cuts and increased tariffs—carry the potential to escalate both national debt and inflation more significantly than Harris’s platform. Regardless of the victor, the incoming administration’s policies will resonate across every sector and reshape the investment landscape.

USD Under Pressure as Election Nears

The U.S. dollar commenced the week under pressure, with the Dollar Index dropping below the 200-day moving average during Asian sessions. EUR/USD has hovered near the 1.09 level, while the British pound (Cable) rebounded to challenge the psychological resistance at 1.30 following recent budget-induced weakness. Gold, as expected, climbed closer to its historical high amid election-induced uncertainty. Concurrently, both the Swiss franc and Swiss equity markets are seen as defensive options for traders wary of a contested election outcome and the associated volatility.

Risk Management Steps Ahead of the Election

Given the elevated risks, here are ten advanced strategies forex traders should employ to mitigate risks:

1. Understand Market Drivers

• Election Outcomes and Policy Implications: Different election results will diverge in their impact on the USD and major currency pairs. Pro-business rhetoric may support risk sentiment and USD gains, whereas expansionary fiscal promises might depress the greenback. Traders should thoroughly analyze each candidate’s economic policies to ascertain likely market trajectories.
• Economic Calendar Awareness: Monitor critical economic data releases surrounding the election, including the Trade Deficit (September), ISM Services PMI (October), S&P Global Final U.S. Services PMI (October), and the Federal Reserve’s Interest Rate Decision, which could coincide with political developments and precipitate heightened volatility.

2. Reduce Leverage

• Prudent Leverage Management: Given the unpredictability of election-induced market moves, reducing leverage is crucial. Over-leveraging in such volatile environments heightens risk exposure, often with adverse consequences.
• Appropriate Position Sizing: Maintain smaller positions in line with increased volatility. Scaling down positions helps manage exposure more effectively during periods of pronounced uncertainty.

3. Stop-Loss Strategies

• Widening Stop-Loss Parameters: Tight stops are more susceptible to election-induced volatility. Expanding stop distances can prevent premature exits but should be balanced with lower position sizes to ensure risk remains manageable.

4. Avoid Overtrading and Control Exposure

• Curbing Overtrading: Election week tends to amplify price movements, enticing traders into chasing the market. This behavior often results in substantial losses. Maintaining discipline and avoiding reactionary trades is paramount.
• Constrain Total Exposure: Limit exposure to correlated positions, especially those heavily reliant on USD movements. This diversification is vital to avoid amplified losses should the dollar react sharply.

5. Hedging Opportunities

• Diversification Through Multiple Currency Pairs: Diversifying trades mitigates directional risk, an essential component during election-related turbulence.
• Implementing Hedging Strategies: Consider offsetting positions, such as pairing a USD/JPY position with a EUR/USD trade, to neutralize exposure to unilateral market movements.

6. Consider Non-Participation

• Stay Out if Conditions Are Unclear: There is no compulsion to trade during highly uncertain periods. Many seasoned traders prefer to sit out such times rather than risk being caught in erratic, news-driven moves.

7. Watch for Liquidity Constraints

• Beware of Liquidity Gaps: Election periods can lead to significant liquidity reductions, especially outside regular market hours. Low liquidity often exacerbates volatility, presenting additional challenges for position management.

8. Set Realistic Profit Targets and Enhance Vigilance

• Manage Profit Expectations: Avoid unrealistic profit targets in a highly uncertain environment. The key is to secure achievable gains without assuming undue risk.
• Closely Monitor Markets: Stay alert to news flows and be ready to adjust positions as markets digest election updates. Adaptability is crucial during times of elevated uncertainty.

9. Recognize Weekend Gap Risks

• Mitigate Weekend Holding Risks: Holding open positions over the election weekend carries substantial gap risk, where opening prices can vary significantly from the prior close. Consider closing or significantly scaling back positions to minimize this exposure.

10. Emotional Discipline and Strategic Adaptation

• Avoid Emotional Reactions: The irrationality of election-driven markets can lead to heightened emotions. Maintain adherence to your trading plan, and avoid knee-jerk decisions.
• Strategize for High-Volatility Environments: Use strategies tailored for volatile conditions, such as straddle setups (placing both buy and sell stop orders to capture large moves) or employing short-term scalping if aligned with your risk profile.

Summary

The cornerstone of effective trading through the U.S. election is a combination of prudence, thorough planning, and adaptability. Forex traders should consider lowering leverage, using more strategic stop-loss orders, limiting market exposure, or even stepping aside entirely if market conditions become overwhelmingly unpredictable. Given the global implications of the U.S. election, robust risk management practices are crucial for mitigating adverse outcomes.

Ultimately, preserving trading capital is paramount during high-risk events like the U.S. presidential election. Whether deciding to actively trade or adopt a wait-and-see approach, an effective risk management framework will be essential in weathering the volatility that is sure to accompany this consequential political event.

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