Are we looking at a repeat of the dollar melt up in 2016?
As Biden leads in the polls, almost everyone has been talking up the case for a 'blue wave' and what scenarios may take place should that happen.
The straightforward one being "buy everything, sell the dollar" of course, but there are some risks associated with that once the euphoria begins to fade.
Over the past ten months, I grew from thinking Trump would easily win this election to thinking that Biden should have this in the bag, judging by the lead in the polls. But now, I'm less confident of that outcome as we approach the home stretch.
I would still argue that the base case remains for a 'blue wave' but Trump winning once again and stealing this election is not within the realms of being unworldly, if you ask me.
As a trader, it's best to be prepared for all outcomes and eventualities, so what is the trade if we do see another four years of Trump in the White House after next week?
Is it going to be the total opposite of the reaction if we see a 'blue wave' outcome?
The biggest clue that the market has to go on is the 2016 melt up in the dollar, where we saw the greenback smash everything in its wake - especially EM currencies.
In case you forgot, we had USD/JPY going from 101.20 to 118.00 in the span of just over a month and even EUR/USD tumbled from 1.1300 to near 1.0300 in that time.
This time around, I don't think we will see a repeat as convincing a surge in the dollar; going past the initial reaction to the election result that is.
The knee-jerk reaction may still be a rush to the dollar based on the 2016 narrative, alongside four more years of geopolitical uncertainty with the market also not really anticipating the result to be the 'base case' outcome given election pricing.
I would say equities will also rally alongside the dollar on the result as we all know Trump prides himself on the stock market and Biden's tax increases can be cast aside.
If Republicans hold the Senate, that will add to the optimism in stocks as stimulus hopes would be renewed as well.
But the stock market reaction is a pretty straightforward one, all things considered.
Beyond that, the real trade would be to fade any dollar euphoria on a Trump victory.
As the global economic recovery continues to encounter more setbacks and the Fed not going to even consider hiking rates in the next 5 years possibly, fiscal and monetary support is here to stay for a long, long time.
Essentially, we're returning to the pre-election status quo and I don't see how that changes the narrative that the dollar is arguably in the early stages of a multi-year decline.
While equities may still be rocked from time to time on virus jitters and negative economic developments, the big picture is that the dollar is likely to falter as long as the Fed keeps their word in the medium-to-long term.
That should see more flows into EM currencies, with the reflation trade narrative only adding reason for investors to pile more money into gold as well.
If a 'blue wave' is characterised by a "buy everything, sell dollar" reaction (at least in terms of a knee-jerk reaction potentially), then a Trump victory should be characterised by a "buy stocks, then sell dollar" reaction (one which is arguably more straightforward).
EU/UK negotiators made progress this week toward resolving big disagreements in Brexit talks
The GBPUSD spike higher on headlines saying:
The GBPUSD shot higher to a high of 1.3009. That that the price above swing lows from October 26 and October 27 between 1.2992 and 1.3000. However, the spike was short-lived. The prices since moved back down and is trading at 1.29623 as I type.
Looking at the hourly chart, the low for the day prior to the run higher reached 1.29159 that was just above the swing low from October 20 at 1.2910. Traders leaned against that low rewarded on the headline news.
For one, the headline news in the GBP pairs can come from a number of different directions. There is Covid. There is the flows from stocks and there is also Brexit. That can make trading particularly volatile as we just witnessed.
Technically, the 200 hour moving average (green line) is near the 50% retracement of the range since October 16 and at 1.3017 area. Ahead of that is the swing area between 1.29921 and 1.3000. Stay below tilt the bias more to the downside.
On the downward extreme we know the 1.2910 area is a support level that the market leaned against earlier. Below that and traders will be looking toward the 100 day moving average at 1.28644 ahead of the October 16 low at 1.28554.
In between the 61.8% retracement 1.29779 may be a barometer that gives traders some comfort. The swing high from October 20 came near that level as well
July low at 104.18. The September low was at 103.995
The USDJPY moved lower today and in the process traded to the lowest level since September 21. The low price reached 104.108. That level also moved between the July 31 low at 104.18 and the September 21 low at 103.995. The current price is back above that swing area trading at 104.27. Can the price remain above that swing area? The dip buyers are leaning with that hope (with stops likely on a break below)
Drilling to the hourly chart, the move down from Monday's high has the 38.2% retracement at 104.467. That is also near the swing low from October 22 at the same level. A downward sloping trendline is also moving toward that area on the hourly chart. If the price can stay below that level, the sellers remain in control. Move above and the waters get more muddy, and the dip buyers from the daily chart, breathe a little easier too.
Oil tumbling. Stocks falling also in play of course
The BOC is expected to keep rates unchanged at their interest rate decision at 10 PM ET/1400 GMT. Of course, there are plenty of other things going on with equities moving lower and crude oil also tumbling ($-2 or -5.08% to $37.57).
Technically, looking at the daily chart, the price has moved above a swing area at 1.3246 to 1.3265. The price has also traded above a downward sloping trendline at 1.3275. Watch the swing area for support a move below would take some steam out of the upward move today
Drilling to the 4 hour chart below, the price high today did extend briefly above the 61.8% retracement of the move down from the September 30 high comes in at 1.32899. Getting above that level and staying above would have traders looking toward the 1.3323 to 1.3339 area. The 50% retracement of the move down from the recent swing high comes in at 1.32499. That is near the lower swing area off the daily chart at 1.3246. Move below both would focus on the 200 bar moving average on the 4 hour chart at 1.3230 and then toward the 1.3210 area.
EURUSD trends lower
The Covid fears and expectations for closures and Europe have pressured the EURUSD from the start. The pair fell below its 200 hour moving average in the last hour of trading yesterday and after waffling around, but below the 50% retracement of the move up from the October 15 low in the Asian session, the European/London traders really pushed the pair lower.
The pair has just broken below a swing area going back to October 13 through October 19 between 1.17243 and 1.17288. The next targets are the lows from October 19 at 1.17027, October 16 at 1.1693 and October 15 at 1.16878.
Looking at the daily chart, the pair has a lot of swing lows and highs going back to the end of July between 1.1683 and 1.17103. A break below that area would have traders targeting the 100 day moving average at 1.16446.
Moves away from 100 hour MA
The USDJPY is trading to a new session low. In the process, the pair is getting close to swing lows from October 22 of October 23 near 104.541. A move below that, then targets the low from October 22 the low from October 21 at 104.469 and 104.336 respectively.
Risk now comes in at the 100 hour moving average at 104.738. The price tried to extend above that moving average in the late Asian session, only to fail once again. Yesterday and earlier today runs above the moving average line ultimately stalled. Yesterday the high price stalled near the 38.2% retracement at 105.011 (and below the falling 200 hour MA - green line). That helped to keep the sellers more in control (the 38.2% is the minimum target for buyers to get and stay above. That try failed).
Taking a broader look at the daily chart, the sellers remain more in control with lower highs and the price a good ways away from its 100 day moving average (blue line in the chart below). T 105.015 to 105.293 area is a swing area to stay below, and tilts the bias more to the downside from a longer term perspective.
On the downside the swing low from the end of July at 104.18 and the failed break of that low in September that took the price to 103.995 are obvious targets to get and stay below.
The 3rd peek below the moving average fails
The GBPUSD - like the EURUSD trades between its 100 hour moving average above at 1.30674 and its 200 hour moving average below at 1.30056 - for the most part.
The difference is that on Monday and again today , the price dipped below the 200 hour moving average, only to run out of steam fairly quickly. On Monday, the moving average is broken on 2 separate occasions and failed. Today, the price peek below the moving average line briefly, and rebounded back to the upside.
For traders, the moving average lines are guidelines for bullish and bearish, but they also give traders clues as to the "markets" enthusiasm about a directional move.
Sometimes, traders may try to make a break, only to find there is not a whole lot of support. It's kinda like putting your toe in the water to test the waters temperature. The toe or even foot may go in, but the whole body won't be ready. It happens. It makes trading frustrating at times, but it also give traders clues that could lead to a counter break trade as well. Traders who bought the failures both yesterday and today benefited from trading the failed breaks.
On the topside, although the pair remains below its 100 hour moving average at 1.30674 (blue line), the price has not burned the edges of that MA line (the high reached 1.3758 today). There is a reluctance there as well.
So the battle continues with casualties on both sides. However, what we know is at some point, there will be a break and run away from this neutral area. In between sits the 50% retracement at 1.30157. An old trendline cuts across there as well. Stay above may be a clue and tilt the bias more to the upside in intraday trading.
EURUSD waiting for the next shove
The EURUSD has seen the price action move up and down and up back up again in trading today.
The high in the late Asian/ early European session peaked right near the 100 hour moving average (blue line in the chart above) currently at 1.1832. The subsequent moved to the downside stalled just ahead of its 200 hour moving average (green line) currently at 1.17938.
Currently the price is back up testing the 100 hour moving average at 1.18321. The market is waiting for the next shove outside of this moving average range.
Get above the 100 hour moving average, and traders will be looking toward the 1.1840 level. That was the underside of the broken trend line. It also was a swing high going back to October 20 and near other swing levels on October 21 and October 22. At the high earlier today price also stalled near that underside of the broken trend line level. Above that and the downward sloping trendline cuts across currently at 1.18517.
Having said that, the price is having trouble getting above that 100 moving average level. Stay below, and sellers feel more confident to push the pair back to the downside (risk is defined against the moving average level). That is, the trading battle between buyers and sellers is still on.
On the downside watch the 1.1814-17 area as an interim bias level. Move below and traders will be looking toward the 38.2% retracement 1.18067 before the run toward the 200 hour moving average.
Ping-ponging between moving average levels (100 200 bar moving averages) is a condition whereby traders are unsure as to the next directional break. Traders leaned against resistance at the higher moving average and buy against support against the lower moving average. Eventually there will be a break, and hopefully a run in the direction of the break. For now, the EURUSD remains within the confines of the extremes.
The greenback trades higher as European traders enter the fray
The dollar has erased its earlier slight losses from Asia Pacific trading, and is now trading to a session high against the likes of the euro and pound in particular.
EUR/USD is down to a low of 1.1801 and sellers defended the 100-hour moving average earlier @ 1.1835 to now test the figure level. Meanwhile, GBP/USD has slipped to a low of 1.3004 and is running into a test of its 200-hour moving average:
Elsewhere, the greenback has also pared losses against the aussie and kiwi for the most part. European stocks are keeping slightly lower after a mixed open but with the risk mood being more tepid and cautious, a firm directional break may be hard to come by.
However, amid the focus on virus jitters to start the week, that is still a considerable factor in trading for now so just be mindful in case dollar buyers try to make more of a play should we see risk sentiment stumble further during the session.
Forex news from the European trading session - 23 October 2020