It's all about the USD!

[Mercury]

On Friday I think we got a little insight into how the market would most likely react to The Donald winning the 8 Nov US Presidential election.  One could be horrified at this though but then perhaps equally horrified at what a Clinton presidency would result in...  What a choice for Americans!  The received wisdom appears to be that Trump would be the disaster scenario while Clinton would be status quo.  Clinton is all fine if you believe status quo is good...

 

In any event the markets seem to want status quo (big surprise, not!) so on Friday, when the FBI announced a reopening of the Clinton email debacle investigation, this seemed to translate as an increase to Trumps chances and we saw both stocks and USD drop.  BTW, the online polls put the election too close to call.  With Brexit the online polls were at 52/48 in favour of Brexit while the regular polls were much further the other way (coincidence?).  Stocks kinda came back but USD did not.  For now it seems that stocks remain buoyed up and may even shrug off an actual USD rate rise as an indication that the Fed believes the economy is getting stronger (is it now?).  Now that is cognitive dissonance in action for me...

 

Current mass thinking seems to be that USD is about to go on a rampaging rally.  Risk uncertainty is everywhere and no more so that the US presidential election and USD is the world reserve currency.  Also the chances of a rate rise by the Fed in December are seemily very high.  But many USD FX pairs are at technical retrace turning points, EURUSD turned sharply on Friday and looks set for a rally phase  USDJPY and USDCHF look set for a drop too and maybe even GBP could get its rally hat on at last.  COT data on the Euro was at extreme levels of Bearishness on Tuesday of last week so for contrarians, like me, it is not a major surprise that the EURUSD caught a bid.  And what happens if The Donald wins..?  Will the Fed raise rates while the markets are in post Trump turmoil?  I doubt it.

 

So much for fundamentals and really at this point who knows?  Looking at the technicals on the Dollar Basket weekly chart I see 2 main scenarios as follows:

 

1. The USD drops back down to the Triangle breakout support zone and then rallies away in the long awaited final surge up.  For me this would require a breakdown in stocks and probably also the bond market.  We have seen a few twitches on these markets of late so this is a credible scenario.
2. The retest of the Triangle support is broken through and we see a further drop to a more conclusive EWT wave 4 before the afore mentioned rally.  (I have mentioned this scenario before in the DX thread so it isn't new)

 

In fundamentals terms both scenarios can be supported.  A stock market rally to a final all time high (US large caps and maybe also FTSE100) supports #1.  A Trump win would probably bring up a sharp stocks and USD drop, followed by a retrace rally (santa clause rally in stocks perhaps?) and then stocks would begin to fall off the cliff and USD would rally as a safe haven.  This supports #2.

 

If you look at the charts you will see that on Friday the DX turned sharply at the 76% Fib level off the Mar 2015 high (probable Wave 3 point).  The turn at May 2016 low was at a relatively weak support point, lower down the 9000 level not only comes at a Monthly chart Fib 38% but also at Fib 50% of the wave 3 move up between May 2014 and Mar 2015.  A more likely Wave 4 point for me, all things being equal.

 

On the Daily chart you can see that Fib 76% turn in close up.  The price action at this point includes a pin bar reversal, negative momentum divergence and key indicators oversold cutting back down.  For EWT people it does look like a 1-5 up to W1 (green) supporting a retrace to W2 and then rally BUT a Wave B [Red labels] is also possible.  For classic chartist a break and retest of the Triangle line is a key bullish indicator IF the retest fails but the move could be a fakeout and break through the triangle in line with scenario #2.

 

In the short term I expect to see an A-B-C formation drop back to the Triangle level and then we will see what happens.  There is an inevitability that this decision point will occur at the US presidential election point, just when margin requirements have doubled and the eventual break could be very swift (just like the Brexit vote really, except impacting more widely perhaps).  Not sure how anyone can predict how this will break.  If Brexit was a black swan moment for GBP (and it was in my view because so few really thought it could happen) then a Trump victory could be the same for Stocks and Bonds.  A Clinton victory only staves off the inevitable in my view but timing is everything in trading... 

 

What do people think is happening just now and will happen on Nov 8th and how are you planning to play it?  I would be fascinated to hear everyone's views.

 



[donaldprice]

Hi their Mercury, good to see you back, these threads where getting lonely with just me and casey lol. I am too shore about the DX, me personally i believe that we could have already started this Bull rally on the DX, but without doubt it is still on the W1 of W5 phase, hence why we could see some pull backs. I am myself still convinced we will see pullbacks on the USD CAD and USD YEN. For USD CAD despite a trade deal now being signed with the EU reducing long term reliance on the US, this may add some positive momentum and the BOC taking the usually wait and see approach and finally from a technical view we still need to complete the ABC retrace. Hence why we must prepare for that possibility. Also with USD YEN, if you where uncertain about the US election, buying the YEN to hedge risk would be a good standpoint along with gold. Although i have been bullish with the YEN last few weeks, i do think that this is still W1, therefore W2 usually retraces a lot of gains, hence why i would considering exiting longs. 

Although i can see a Clinton victory, i am still skeptical and since Brexit, a Trump victory is also possible. And no doubt many, many, others are contemplating the same scenario. Therefore for me, i think i would be looking at the YEN for a possible short entry and may pyramid my way through it, if the opportunity of course permits. 

[Mercury]

Hi , I also start out with a view that the current move up is W1 [probably W1 (green) of W3 (blue)] BUT the markets have been throwing up curve **** for over a year now and until the stocks and bonds markets begin the long awaited decline I can't see the USD rally really getting going.  In addition the whole move up from May 2016 low is not reminiscent of a clear W1, which is why I am watching out for the Wave B option as a real possibility.

 

Looking at the FX crosses that make up DX it seems clear to me that a retrace is on but for how long?  On EURUSD you could see a return to the Triangle breakout in line with DX and same on USDJPY and so if we see these two turning at the same point as DX that could be the answer.  However with GBP it is harder to see and a much stronger retrace is possible.  With USDCAD and USDCHF (see below) it looks more like a Wave B turn with a strong Wc to come.  Note that the turn on USDCHF is at a major Triangle line & Fib 62%.  Note also that a Wa/Wc equivalence results in a retrace end at the Fib 38% from the 12 Jan 2015 flash crash when the peg to the Euro was removed by the Swiss central bank.

 

All-in-all, given the progression of EURUSD since Mar 2015 in a protracted consolidation I can easily see this continuing.  I'll post separately on this pair.  Given the extreme levels of uncertainty surrounding this US presidential election (not just a normal Red v Blue choice) I am option for greater levels of caution and stronger probabilities or the unthinkable, as with Brexit.

 

I am Short USDCHF at the turn, also short USDJPY but I think USDCAD may not be quite ready with Oil still not bottomed out (thought I am seeking a shorting opportunity and Long on Oil).  Will be interesting to watch progression this week as we approach US election day.

 



 

 

[Mercury]

So far so good with the DX and now we may be seeing the Wave A turn.  If my analysis proves correct then a rally to a lower high brings up a wave B and then we will see if we get a sharp 1-5 move down in Wave C before the long term trend of a USD rally resumes.  This currently matches EURUSD at a retest and turn down point and also matches USDJPY.  If DX works as forecast then a second retest of the EURUSD resistance area is probable, depending on how far it drops in this next phase of course.  I expect all USD pairs to move in favour of the USD with the possible exception of USDCAD where any Oil strength may negate USD strength.