I am sure every trader is aware of the USDollar weakness that ensued this past week due to concern over the outcome of the US election on November 8. As you may remember, last Friday the FBI announced that new e-mails had been discovered in the Clinton investigation which saw a drop in the USDollar against all its counterparts, except Mexican Peso which weakened quite significantly.
On Monday USDollar moved up slightly during the London session though at the opening of NY price fell and continued falling for the remainder of the week, as polls between Clinton and Trump continued to narrow. Bearish momentum slowed slightly on Thursday and Friday though USDollar bulls failed to break the downward trend despite positive data and an increase in the chance of a rate hike as per the Fed Watch Tool, which has subsequently dropped down from 71.5% to 66.8% since Friday.
Due to the market uncertainty over the election, investors have moved to cash to protect their portfolios. This is important to note because one should pay attention to the bigger picture. While the election was the only game in town last week for USDollar traders and will probably remain so for this week, we can’t overlook the FOMC and the future of interest rates for America. Some traders argue that a trump win could change the Fed’s course though we need to look at the facts and remain focused on what is real vs. reacting emotionally to speculation.
The FOMC have been very clear about what they want to see before they hike rates. At the last FOMC meeting the board decided to leave rates unchanged saying that they will continue monitoring the job market and inflation indicators which are moving in a positive, albeit gradual, direction. In the statement, several mentions regarding energy prices were made saying that inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The recent fall in the oil price is not what the FOMC wants to see. A low oil price is an inflation killer – especially when one considers the rate of the drop in the price over such a short period (last week saw the biggest weekly decline since January).
As far as data releases are concerned, we saw a bullish release on ISM Manufacturing and ISM Manufacturing Prices though ISM non-manufacturing came in less than September. Non-Farm Payrolls came in a little lower than forecast though what you want to pay attention to is the revised number from September – up 191k from 165k. Also average hourly earnings came in higher than expected with a revised number from September – up 0,3% from 0,2%. The FOMC will be happy to see that.
US 10Y Treasury Note Yields closed the week at 1,79 down slightly from the previous week’s close at 1,86, hence the slight drop in the Fed Watch Tool.
In a speech by Stanley Fischer on Friday, Vice Chair of the FOMC, and the Mundell-Fleming Lecture by Lawrence H. Summers at the IMF Annual Research Conference, it is very clear that the focus right now is one of decreasing demand and low interest rates globally. Fischer mentioned in his speech that continued improvement in the labor market and a continued move towards or exceeding the inflation target will provide an indication as to the behavior of output and indicate where growth in demand is going to come from in the coming years. I think what is key to recognize here is that while traders face short term volatility caused by risk events like the election, the FOMC are looking at years of back data and forecasting years into the future. The term of the Chair and Vice Chair of the FOMC far exceeds the term of a president, even if the president serves a second term. Therefore focus on the bigger picture and be careful of being swayed by a market that is behaving in an irrational or emotional manner at the moment. While recent market moves have not been ideal for USDollar bulls, I am going to have to hear the FOMC clearly state that they are done with raising rates before I change my long-term bias from bull to bear.
Commitment of Traders Report 1 Nov
It is important to identify whether the recent bearish rally in the USDollar was due to an increase in short positions or simply bulls getting out. If it’s lots of bulls getting out then we can expect these buyers to return to the market once the election is over, should the outcome of the election not change the reason they were long in the first place which I attribute to future rate hikes and a bullish US economy. However, if the drop was due to lots of sellers entering the market then we need to pay attention to why we have USDollar bears suddenly entering the market as that means something fundamentally has changed.
Overall the COT report does not indicate an increase in USDollar bears on any of the pairs except Aussie where we did see an increase in traders long Aud and net non-commercial positions trending up week over week since 20 Sep ’16. Note that the COT report was drawn before the UK court outcome and BOE rate decision meeting and so next week’s COT report will indicate if there was a change to traders long GBP.
Recent market moves could indicate that a Trump victory would result in a drop in the stock market, weakness in the USDollar and Mexican Peso and strength in the Japanese Yen while a Clinton win would result in a rise in the stock market, USDollar and Mexican Peso strength and Japanese Yen weakness.
Of course, one must consider possible scenarios that could take place. A win would have to be uncontested by the loser, which is unlikely, and the winner would have to win by a large margin. This means that however the market decides to respond to the outcome, we could see a lot of volatility and some massive whipsaws in either direction before the market chooses a final direction on the day or in days to come.
This sounds like a lot of risk to me and while a lot of traders are thinking about how much money they are going to make trading this, one has to think first and foremost about the possibility of losing money as a result of highly risky and highly volatile market conditions. Keep in mind that when the news is released the market will move with a further market response seen in the following Asia, London and NY sessions. If you are going to trade then have a plan for a Trump win or a Clinton win with a clear idea of the pairs you are going to trade and how you intend to trade them with important levels of support and resistance clearly identified before the results are released. Also, be a little more conservative with your lot size than you usually are. Above all – definitely, absolutely and without a question of a doubt, do not risk money you can’t afford to lose.
Move on the USDollar, USDollar pairs, Nikkei and Yen pairs will be dictated by the outcome of the election. The purpose of the following technical analysis is to identify immediate and longer term support and resistance as well as existing trend lines. I will be keeping a close eye on Dxy and the Nikkei and then using this information to inform USD strength/ weakness and Yen strength/ weakness. The reason for including a Nikkei analysis in a USDollar weekly review is due to the correlation with Yen, the USDollar and US 10Y T-Note. When the yield for the 10Y T-Note goes up Yen weakens as a result of the Nikkei moving higher. This is due to investors going long Nikkei stocks due to the strength of the USDollar weakening the Yen. A weaker Yen means better earnings from Japanese companies and therefore a better return on investment for bulls long Japanese stocks.