US Dollar Elections Analysis – Forex Trading Strategies
US Dollar Elections Analysis
Donald Trump vs. Hillary Clinton. How would a Hillary victory impact your trades? This US election has certainly become a global concern, especially for your money. We sure are due for a US Dollar elections analysis to develop a forex trading strategy for each scenario. Read on for Invest Diva's IDDA approach to strategy development.
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US Dollar Elections Analysis | Fundamentals + Technicals + Sentiment
There’s little doubt that the upcoming U.S. presidential election will be one of the most-watched and hotly anticipated in a long time. Not only there are incredibly vast policy differences between the two candidates, but also they both have a long history of being controversial.
With the world now watching, this presidential election has already started influencing the markets. This shall continue after the elections. If you are an Invest Diva student, you probably have already started your portfolio risk-management to get ready for the big day: November 8th.
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Here, I'll break down the US Dollar elections analysis before and after November 8th, and for both a hypothetical Trump or Hillary victory.
Before November 8th Election Day: US Dollar elections analysis
While there are many other factors also impacting the US dollar (hello? Interest rates hike anticipation?) the market has certainly been swinging after each presidential debate. The swings shall continue in the next two weeks as more controversy comes into play.
In a nut-shell: The US dollar has been strengthening every time there polls gain in favor of a Hillary victory. The main reason behind this is the uncertainty that a Trump victory could bring into the US economy. And the global markets hate uncertainty.
Speaking to many fellow-international investors over the past year, it is apparent that the majority of them see a Trump presidency as a threat to the US economy. Thus, they start dumping poor Ms. USA (US dollar) against her major forex counterparts every time the polls show Doland ahead in the race.
An exception to this is the Mexican Peso. As you may already know, Trump has vowed to build a wall around Mexico should he become president. Since this threat could impact Mexican trade among other economic factors, Mexican Peso has also been dropping when the polls show Trump ahead.
If you are torn between biased polls and not sure which one to follow, the Princeton Election Consortium is a scientific polling system which also predicted Brexit happening. It currently shows Clinton's meta-margin +4.8% ahead of Trump's. As for the senates, the Democrats are +2.0% ahead for a chance of winning the control over the republicans.
Republicans VS Democrats
While this controversial election has a lot to do with the personality of the presidential candidates, the parties they belong to also have historically had an impact on the direction of the US dollar.
In the chart below I have analyzed the US dollar index (DXY) performance in the past three decades. The red boxes show the range during a Republican US president. The blue shows the price action during which a Democrat was the President of the United States.
In this chart, it is apparent that once the second term of Reagan kicked in 1985, the US dollar has generally moved down under Republicans, while it has generally moved up during Democrats.
This could also be yet another reason why a Hillary victory anticipation has been boosting the US dollar in the past weeks.
After November 8th Election Day: US Dollar elections analysis
Reading the above, you may think that a Hillary victory could immediately push the US dollar higher right after the election day.
The fact is, it is a bit more complicated than that this time. First and foremost, the market is already priced in a Hillary victory.
Almost everyone on Wall Street currently predicts Hillary Clinton will win the White House. A Trump victory would likely cause forex and stocks investors to flee stocks to the safety of gold and bonds. Trump is the king of unpredictability (something traders hates), and he's campaigned on an anti-trade agenda.
But what about if Clinton wins?
Don't expect a big rally. In fact, markets might take a dip then too.
The US is right now a very divided country. With Trump spreading conspiracy theories about the elections being rigged, there is a good chance we could see a civil war or riots throughout the US after the election day. Yet, another reason for market volatility.
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However a Hillary victory could give the Fed enough confidence to raise the interest rates in December. In which case we could see yet another rally in the USD after the election results have settled.
Trading Strategy - US Dollar Elections Analysis
Let's take an IDDA approach for US dollar traders before and after the elections. Remember that this is an analysis of the US dollar ONLY. While trading the USD in pairs, you should ALWAYS consider the cross currency as well.
Short-Term: In the next two weeks, we may see a continued strength in the US dollar, unless there is a massive negative news out of the Clinton campaign. Depending on your risk tolerance, you could set short-term bullish goals on the USD crosses. Try to get out before the Elections.
Election Day: There could be a Brexit-style volatility on the day of November 8 across the USD board. I would stay out of trading that day as it may contain too much risk.
Post election: A Trump Triumph could have yet another Brexit-Style impact on the USD, with it potentially dropping to new lows.
A Hillary victory could still have a bearish impact on the market, albeit less concerning and shorter-lived.
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