What a week for the USDollar and America. For many, including myself, this was their first time trading an election and for those that have traded an election before I am quite sure very few have traded one like the one we have just experienced. Many believed that a Trump win would be a black swan for the USDollar, America’s very own Brexit and nullify any action from the Fed. In my USDollar forecast last week I advised readers to focus on the facts and not be swayed by emotional, irrational trading and that any weakness in the USDollar pre-election was due to profit taking and not selling and that bulls would get back into the market once the election was over due to the bigger picture not changing. The bigger picture being the FOMC meeting in December and high percentage chance of a rate hike.
The lesson from all of this – know the facts, stick to your bias and don’t be swayed by the speculation and hearsay of other market participants. If you noticed the chance of a rate hike drop during the election this was because of the US 10Y T-Note Yield dropping though the moment President Elect Trump told markets that large fiscal spending would ensue with a Trump administration the markets quickly started selling treasuries due to a concern over higher inflation which would lead to higher interest rates. Fact is, without the Fed even acting, interest rates have already gone up in America due to the yield on the 10Y T-Note which closed the week at 2.15% vs. 1.79% for the previous week. Markets are keeping a close eye on the FOMC, their December meeting and an indication of the rate path for 2017 under a Trump Administration. Chance of a rate hike is currently sitting at 81.1% as per the Fed Watch Tool.
This week several FOMC members spoke to the markets including Stanley Fischer on Friday. Some analysts are reporting that Fisher was hawkish in his speech though I would say he was neutral and that the Fed is still eyeing data though he did say that the Fed is moving towards its target and that when the Fed decide to act it should not be a surprise to markets. He did not indicate that this would happen in December and while current market volatility may not justify a vote to hold rates at the next meeting, the month is still young. We are going to want to pay attention to inflationary data coming out of America next week though keep in mind that the recent drop in oil prices will only reflect in the November CPI reading which will be released in December.
What impressive strength we saw from the Great Big Pig this week. This was due to a rising 10Y Gilt Yield combined with no further rate cuts from BOE and investor confidence in the UK after President Elect Trump contacted PM May and advised her that he would like to see America and the UK work closely together on a trade deal, which goes against current President Barack Obama’s previous comments. The market is still net short on Sterling as per the COT report though keep in mind that the COT report does not include any positions post the election. If you are long GBPUSD keep a close eye on resistance at 1.28 marking the bottom of the post Brexit range and remember that the trade deal with the US doesn’t make Brexit or article 50 disappear. Support eyed at 1.25.
The EU, and especially Germany, are concerned about Trump’s views on free trade and European leaders have been rather outspoken against Trump though since the win France and Germany have congratulated Trump and invited him to meet with them as soon as possible. Recent anti-establishment shown by Brexit and a Trump victory are making Italy and France nervous ahead of the Italian referendum and the French election next year. COT shows a nice bearish market on EURUSD and a strong USDollar definitely helps. 1.085 is playing as support currently. A break would see bears aim for 1.08 and then 1.07 or 1.06 as a more aggressive target. Resistance is eyed at 1.09 and 1.10.
As mentioned in the summary strong fiscal policy resulting in higher inflation would lead to faster easing from the Fed which the market is already pricing in as per the 10Y T-Note yield. This would make the carry trade on the Aussie less profitable due to a less attractive yield differential resulting in AUDUSD bulls getting out of the market. Trump’s disdain for free trade and comments that he would impose tariffs on China’s trade could result in a slow down in trade between America and China and with China being Australia’s biggest trade partner this would impact negatively on Australia’s domestic economy and therefore the RBA may need to look at further rate cuts in the future. Technically price broke a key support trend line from Jan ’16, May ’16, Sep ’16 and Oct ’16 lows which means that continued bearishness is probable, especially if we see positive inflationary data out of the US this week and continued rise of the US10Y Yield. While the COT report does show a very bullish market this data does not take the election into consideration. Support is eyed at 0.75 and 0.745 with resistance eyed at 0.76.
Similar story to Aussie as far traders getting out of the carry trade is concerned, especially with RBNZ cutting rates this week. Price is at a key support trend line from Jan ’16, May ’16 and Oct ’16 lows. A break of this line could indicate the start of a bearish trend with near term support around 0.70 and resistance currently eyed around 0.72.
America is Canada’s biggest trade partner and a cancellation of the North American Free Trade Agreement would not bode well for the Loonie. Also the Trump Administration is very keen on America having total energy independence and encouraging America’s fossil fuel producers – that means more supply which means oil price down. May not happen right now as these policies take time to implement and get through congress though the intention has been clearly stipulated on the www.greatagain.gov website. Support eyed in the area of 1.34 with resistance eyed in the area of 1.35.
The yield on the US 10Y T-Note is providing Yen weakness which is good for the BOJ as this may help them with their inflation targets. With bond markets closed on Friday we saw some sideways trading on USDJPY. Something worth noting is that the Nikkei came off the resistance trend line marking the top of the ascending triangle on the daily chart marked by July ’16, Sep ’16 and Oct ’16 highs. A break of this resistance would bode well for Yen weakness. USDJPY has found resistance just below 107 though should the US 10Y yield continue rising as a result of the FOMC raising rates and indicating that further raising will take place next year, 108, 109 and 110 are possible by the end of the year. Support is eyed at 105.500