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“Relief” was the sentiment dominating the foreign exchange market in the aftermath of the first US presidential debate as traders proclaimed Hillary Clinton the winner over the candidate investors fear, Donald Trump.

Such a feeling may not last long. Because bound up in the market’s reaction to the debate are nagging concerns — that traders have rushed to judgment, have been complacent about the prospect of a Trump victory and are unable to grasp how to price political risk.

Matthew Cobon, portfolio manager at Columbia Threadneedle, certainly detects what he called “a positive Hillary sigh of relief” in the FX market that generally boosted emerging market and commodity currencies as the dollar eased.

The Mexican peso, a proxy for election risk given the Republican candidate’s repeated campaign promises to build a wall along America’s southern border, deport illegal immigrants and renegotiate trade relationships, rallied as much as 2 per cent as traders watched the debate unfold.

“But I would be surprised if that’s the end of the news front on this one,” Mr Cobon adds. “I don’t think the market necessarily knows what the outcome means yet. It has a broad idea that Trump is ‘bad’ and Hillary ‘good’, but it’s not a well-formed idea.”

If the peso’s 2 per cent rise appears extreme, bear in mind that the currency had slumped 8 per cent in the two weeks preceding the debate, and by 14 per cent since May. “It’s been on a weakening trend for a long time,” says George Goncalves, Nomura’s head of rates strategy.

Yet the post-debate mood was felt elsewhere in emerging markets. The Korean won, South Africa’s rand and the Indonesian rupiah all benefited. Meanwhile, the yen, which traders expected to strengthen in the event of a strong performance from Mr Trump, instead weakened.

All this amounted to “an overreaction”, says Mr Goncalves, a view shared by Stephen Jen, chief executive of asset manager Eurizon Capital.

“The polls will barely be affected by this debate as the issues involved in the presidential elections are complex, and it is way too premature to draw conclusions,” says Mr Jen.

Investors with a gnawing sense of déjà vu probably lived through the climax of the Brexit campaign. As the spot market gyrates to the respective opinion poll fortunes of the presidential candidates, so sterling was bought and sold as pollsters plotted the likelihood of success for the Remain and Leave camps in the UK referendum.

Further parallels are detected in the FX options market, which provides a window into the extent of future shifts in a currency.

This sector indicated sterling could well plunge towards $1.30 in the event of a Brexit vote to leave the UK and that expectation was swiftly vindicated in June. Similarly, current options pricing for the Mexico peso is elevated ahead of the US election in November.

Do not think the worst has passed for the peso, says Michael Metcalfe, head of macro strategy at State Street Global Markets. Brexit implied volatility levels are more than double where they have reached for the peso, so “the markets could price in a lot more volatility”, says Mr Metcalfe.

Markets may be best advised to consult their Brexit notes for assessing US election risk, but not all political events are in the same bracket.

Spain’s ongoing problems in forming a government has had very little impact on FX or fixed income, Mr Metcalfe points out, and there may be a similar degree of “benign neglect” towards the upcoming referendum on the Italian constitution.

“Not all political risk is equal,” he says.

But there is little sign of it going away. “I think we are building up a crescendo of political risks on a number of different frontiers,” says Mr Cobon — “Brexit, the US election, Europe. It’s all kind of semi-related.”

He says broader financial markets are not adequately reflecting political risk and that it’s a strange time to be pricing in low volatility, when a debate is raging about the credibility of central banks and government.

“The fundamental backstop for risk is being questioned,” says Mr Cobon. “Effectiveness is being questioned on a number of fronts. Does that give you a recipe for calm markets for a long time? I don’t think it should. But the market is just trading headlines.”

This Clinton relief rally may have little substance or logic to it. But for Mr Jen, it has one advantage.

“We just had a real-life experiment of what would happen after the election,” he says. A Clinton victory would probably be positive for equities and negative for the dollar. A Trump victory might have the opposite effect, at least in the short term.

“Regardless of whether the market reactions have been excessive, they give a good indication for how the markets would absorb the election outcome,” Mr Jen says.

Few investors would find much relief in that.

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