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Andreas Zanin
Analysis | November 4, 2020

Trading the US Elections: A Close Vote and a Stronger USD

Trading the US Elections: A Close Vote and a Stronger USD

04/11

“Wall Street and global financial executives are waiting anxiously for a clear winner in the 2020 U.S. election after President Donald Trump called foul play, stoking fears of a drawn-out count that keeps markets and businesses hanging.” (Reuters)

It will probably be a few days before all votes in battleground states are counted and whoever wins it will be by a close margin. Last night we saw Trump become the narrow favourite to win. Looking at betting odds trump is now the odds-on favourite to win, according to a survey of bookmakers, Biden went from ½ yesterday to 5/4 today, with Trump now at 4/5, according to betting site Oddschecker. Before the elections Joe Biden had been given a plus 70 percent chance of winning but overnight bookmakers odds give Trump a 69% chance of victory.

In our view, whoever wins will face the loser contesting the result. Trump has already indicated that he will and the Democrats in the lead up to the election also indicated they will do the same. If the loser contests this will mean a battle in the courts and the US without effective Government while the Supreme court decides who should Govern.

The market had positioned itself for a landslide Biden and Democratic victory and that will not happen now. The USD has limited downside and the potential for a big rally as the large number of speculators who are short exit on stop. We have a bearish extreme as per the USD optimism chart below and if we break out the upside in the DXY look for a broad-based USD rally.

Our views on individual pairs remains the same as per our previous posts.

In terms of a narrow Biden win there is no big downside for the USD in our view and a narrow Trump win or a contested election is bullish for the USD and speculators are heavily short so we are looking for a short-covering rally against other major currencies as per our previous posts.

Technical Analysis Key Levels

DXY Dollar Index Daily Chart: The USD remains in a tight range but we are up on the day and now looking for a breakout above todays high to follow through to the upside. In terms of speculators they are heavily short and to correct oversold, we expect a rally up to the 98.00 level.

USD optimism at 10 year low U.S.

Dollar optimism index’s 100 day average is at its lowest level in more than 10 years and we know from positioning data that USD shorts are at a >2sd level, but we are starting to see small signs of reversal and expect it to rally to the upside.

 

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