Recent fundamentals have been playing heavily on the markets. US Fed stance has moved from “Taper or Not to Taper?” to “When to Taper?”, at least that’s what I gathered from yesterdays’s FOMC announcement.
US election voting is almost over and results have started to come in, but what does it all mean for Forex market and how can you profit from the outcome?
For currency markets the biggest driver is the “Fiscal Cliff”. Victory of Republican candidate Romney is viewed positively for dollar as he is likely to enforce tighter monetary and fiscal policies to avoid the fiscal cliff.
He is also likely not to reappoint Fed chairmen Ben Bernanke and could possibly appoint someone with a more hawkish outlook towards Quantitative Easing.
In simpler words; since QE devalues USD because more dollars float in the market, a change in such policy means dollar would move higher against Euro and other currencies. In layman terms, EURUSD would move lower.
He has made it very clear that China will be labelled “”currency manipulator” on the very first day he is elected. This could trigger a dramatic reaction in the Forex market.
On one hand we may see “currency wars” between countries as they all try to lower their currency to make them more competitive in the global market. This uncertainty would lead to traders seeking shelter in safe haven currency – the US Dollar. Again in layman terms, it means bearish for EURUSD.
China’s reaction to this situation, on the other hand, could be to pull out from buying US treasuries, which would most certainly send the U.S. Treasury prices crashing, hence lowering US Dollar (Bullish EURUSD)
In order to avoid Fiscal cliff by January, successful negotiations would need to be reached in the House. Even if Mr. Obama wins but fails to increase overall seats Democrats hold in the house, this would make the negotiations even harder.
This would mean very bullish for US dollar as economic risk arises from fiscal cliff would be perceived as global risk and we know from time and time again that traders will buy US dollars in times of uncertainty.
Regardless of the election’s outcome we will see increased market movement and rise in overall volatility. Situations like this is good for our trading strategy as we do not hold biases and ready to open trades in either direction based on market momentum.