- It wasn’t the best week for equities which closed broadly lower. News of new lockdowns for France and Germany saw the DAX plummet -8.6%, whilst rising covid cases in the US, fears of further lockdowns and the dawning realisation that the election won’t be a slam dunk for Biden pushed US indices lower.
- With lockdowns back in fashion, oil demand is also expected to plummet which saw WTI and Brent fall -10.2% and -10.3% respectively.
- Weaker oil prices weighed on the Canadian dollar and saw USD/CAD rally 1.5% – the largest gainer of the week among FX majors.
- The risk-off tone last week saw USD in demand as a safe-haven currency, although it finished flat against the Japanese yen as JPY was also in demand.
Trader FX Positioning (COT Report):
As of Tuesday 27th October:
- Traders were their most bullish on MXN futures since March. However, given USD/MXN reluctance to break beneath 20.85 support we see the potential for a bounce from current levels.
- AUD remains marginally net-long yet we saw a reduction of both longs and shorts last week.
- EUR futures saw the largest weekly change, with net-long exposure being trimmed by -10.4k contracts.
Calendar Events This Week (Time are GMT+10 Sydney)
Despite this week’s calendar events, the US election really is the only game in town this week. Simply put, markets want a clear winner and do not want the results to drag on, yet this is a real possibility. If a winner is not announced on Tuesday we would expect a risk-off tone to grip markets which could weigh on equity prices. And to avoid this scenario we would need to see a landslide victory from either Trump or Biden. We could argue as to which victor would be more bullish for stocks, but at this point, markets would be happy for either to win the election and send shares broadly higher.
In some ways we are seeing a repeat of 2016. Democrats have been ahead in the polls, yet we know how that played out (or backfired) last time. Betting markets likely show the truer picture, and whilst they have place Biden as in the lead, that lead has narrowed as we head towards the election.
Biden Needs a Landslide to Avoid the Supreme Court
But Biden would need to secure a landslide victory to avoid a drawn-out result, which could very well see him lose the election. If it is too close to call, Trump is unlikely to concede and then take it to the Supreme Court, which is now dominated by Republicans. The last time we had a similar scenario was when Al Gore (Democrat) won the popular vote in 2000, only to see George W Bush win the electoral vote after taking it to the Supreme court to ‘win’ the election.
Postal Votes: Delays Expected
But there is also the issue of postal votes delaying the result. Different states have different rules for how they count postal votes. Some will only accept postal votes received by the election day, whilst some states like California will accept postal votes as long as they posted no later than the election day. So in theory, a vote could take weeks to arrive and still be counted. And these votes also take longer to process as signatures need to be checked to make sure they match with registration cards. And most states do not begin counting postal votes until the day of the election.
Conceding is For Losers.
Literally. Hillary Clinton has strongly urged Joe Biden to not concede on election night “under any circumstances” because the final results are expected to be delayed. This could see markets in limbo, making directional trading strategies less lucrative. And as we do not expect Trump to concede unless Biden wins a landslide victory, we may be in the long haul.
The best outcome for traders is that we see a president elected on election day. Its debatable as to whether it matters who wins – but investors don’t like uncertainty and simply want a conclusion. If Trump doesn’t acknowledge a Biden win then we’d expect a risk-off tone to grip markets, sending equities lower and safe-havens such as CHF, JPY higher. Ironically, gold may also trade lower as lower equities could trigger margin calls and force investors to sell their gold to cover losses.
Out of the two we’d expect aw Trump victory to be more bullish for indices than a Biden win. Trump is an open advocate for lower taxes and lower interest rates which is beneficial to business, their profits and therefore stock prices. Yet Biden is more likely to raise taxes which could be bearish for US shares. Still, we’d still expect equities to receive a boost from a Biden win as investors get a conclusion. But just not as bullish for stock as a trump win would be.
AUD/JPY: Consolidating Below Resistance
- Two Doji’s have formed below the 79.37 – 74.20 resistance zone. We expect further consolidation ahead of the election.
- Two lower highs (LH) have formed as part of a downtrend. So the bias remains bearish below 73.97 – 74.20 resistance zone with 72.53 in focus.
- Bears could consider fading into minor rallies beneath the resistance zone. A break above it invalidates the bearish bias.
CHF/JPY: Find Support at the 200-day eMA.
- CHF/JPY has found support at the 200-day eMA for the second time since late September. Notice how a bullish engulfing candle formed last time ahead of a +2.9% gain from the 200-day eMA.
- We expect prices to remain rangebound ahead of the election, but a Biden win could see CHF/JPY rebound higher.
- A clear break above Friday’s high suggests a swing low is in place, a break beneath Friday’s low (200 eMA) invalidates the bullish bias.
EUR/AUD: Momentum is Slowly Turning Higher
- A bullish engulfing candle suggest a swing low has formed at 1.6460.
- Prices have retraced within the engulfing candle, although momentum is now turning higher.
- A break above 1.6686 assumes bullish continuation and brings the 1.6826 and 1.6893 highs into focus.
- A break below 1.6460 invalidates the bullish bias, although the 1.6530 low can also be used to fine tune risk management.
Bitcoin (BTCUSD): Testing the September Highs
- Bitcoin has gapped higher over the weekend and is considering a break of the September high.
- The trend is clearly bullish so the bias is for an eventual break above resistance.
- Bulls could consider entering long on a break above September’s high, or wait to see if resistance to turn into support.
Ethereum (ETHUSD): Swing Low Forms Above Monthly Pivot
- Whilst Ethereum lacks the volatility of its big brother Bitcoin, it still present opportunities relevant to swing traders.
- Support has been found at the monthly pivot and prices have gapped higher over the weekend.
- Next target is 425, and a break above here brings the 480 highs into focus.
USD/CNH: Prices broke beneath Thursday’s low to confirm the bearish 2-bar reversal, yet Friday produced a bullish hammer. The bias remains bearish below Wednesday’s high but there is potential for prices to retrace within Thursday’s candle.
AUD/USD: Prices remain anchored to key support at 0.7000. There’s potential for a bounce from current levels which could remains within the bearish triangle. But if Biden wins a landslide victory then we’d expect risk-on sentiment to push AUD firmly higher. A break below 0.7000 assumes bearish continuation.
AUD/CHF: Prices have retracted towards the lower bounds of the 0.6450 0 0.6500 resistance zone. Bears could consider seeking a swing high on an intraday timeframe to target the 0.6375 low.