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Dollar Outlook Depends on the Outcome of a Very Contentious Election

Dollar Outlook Depends on the Outcome of a Very Contentious Election

2020-11-03 03:30:00
John Kicklighter, Chief Strategist
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Dollar, S&P 500, VIX Talking Points:

  • The US election is on tap for Thursday and the markets are paying close attention with global policies up for grab while the VIX runs 176 trading days above 20
  • As a benchmark for the US polls, the Dollar is arguably without match with a direct fundamental exposure ranging to a well-establish safe have status
  • A contentious outcome in the Presidential election will test risk trends while a distinct outcome (Trump or Biden) seems to support expectations of a Dollar and SPX climb
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Anticipation for the US Election Puts Risk Assets On High Alert

We are heading into the election for the 46th president of the United States and market participants are looking on with rapt attention. Over the past four years, more than the normal change in tide of economic performance has occurred. We have seen global trade relations fray at the US epicenter while the rise of a global pandemic has drawn an unusual break from the status quo from the world’s most prosperous member. There is much at stake economically and financially, hence the market’s deference. While volatility may be far off the pandemic highest (VIX north of 80), we find the implied volatility has held above the historical average for 176 consecutive tradition days – the longest such period of elevated concern since the Great Financial Crisis.

Chart of VIX Volatility Index

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Chart Created on Tradingview Platform

Anticipation for the US election and its significant sway has set traders on edge. The weight of the event is seen in implied volatility measures, but what is perhaps particularly remarkable is that that the markets have not move to significantly balance its remarkable risk exposure. Over the past decade, risk appetite has been a prevailing drive with second thoughts on speculative indulgence only brief affairs before investors crowded back into brief pullbacks. Well, as Isaac Newton posited in the late 1600s, what goes up must eventually come down. Markets are not prone to the same laws as physics, but even speculative indulgence has its limitations. At the very peak of the risk spectrum, the tech sector of the US equities market has even started to ease off these past few weeks. The ratio of the Nasdaq 100 to the blue-chip Dow (US equities being an outperformer in general) has seen two hearty days’ retreat. Should this turn into a flood, speculators should beware.

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Chart of Nasdaq to Dow Ratio with 100-Day Moving Average Overlaid with S&P 500 (Daily)

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Chart Created on Tradingview Platform

The Enormous Fundamental Weight of the US Dollar

Perhaps the most confounding issue for the markets at present (at least for myself) is the persistence of speculative appetite through seemingly endless fundamental squalls. This resilience will eventually come to an end and risk appetite will be found to be far over-extended. Yet, that tipping point is open to enormous interpretation. In the meantime, the relative properties of risk-reward from the US Dollar will reflect more immediate values with nuance. The relative strength of the world’s largest economy – or at least its appeal as the most liquid currency – continues to press upon the market’s appetites. Election volatility considered, it is remarkable that whether the election goes to incumbent Donald Trump or challenger Joe Biden, our poll expects an approximate 63 percent probability of a Dollar advance. Perhaps that is owing to the unlocking of US stimulus which has been likely delayed by this election time table.

Twitter Poll On Dollar Response on Election Outcome

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Poll from Twitter.com, @DailyFX

On the opposite end of the spectrum, the Greenback still maintains a serious roll as a safe haven currency – if only risk aversion would hit the intensity necessary to summon its true appeal. The benchmark currency has struggled to keep pace with the punctuation of risk trends measured out by sentiment milestones like the S&P 500. The Dollar is a safe haven that stands out in particular when liquidity is the top concern. Markets scramble for such absolute safety when financial stability is at its most fragile. We may very well see our present convergence – elections, Covid, recession – urge such a wholesale re-evaluation, but the panic has no be cued just yet.

Graph of Risk Intensity and Asset Alignment

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Scale Made by John Kicklighter

Taking stock of the Dollar’s safety bias, there have been explicit periods over 2020 where he benchmark has missed he boat on modest faints in sentiment but has in turn surged when confidence has all but collapsed. Perhaps the most appropriate example of the fundamental role for the world’s most liquid currency is back during the height of the Pandemic. Fear crested in March with the shutdown of the global economy during the first wave of the coronavirus and the USD found is role at a premium. Will we see sentiment hit such straights again in the near future? The Dollar is ready in such an event.

How could US elections impact the markets? Click here to see our aggregate report on themarket reaction to election.

Chart of DXY Dollar Index Overlaid with VIX Volatility Index (Daily)

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Chart Created on Tradingview Platform

What Comes Next

Through the very immediate future, it can be difficult to imagine any other fundamental struggle other than the US Presidential election and its fallout. However, the event will pass and the markets will have to move on and fix on other matters. What is the next systemic risk on the docket after the US election clears? I asked this in a social media poll, and by Monday evening, the top vote for next major milestone was on ‘stimulus’. That would align with the other polls that we have conducted recently asking participants what they thought the outcome of the election and market reaction would be for the S&P 500 and Dollar. In both instances, the scenarios added up to a bullish view for the index and currency. That would seem to fit an expectation that long-delayed stimulus would be unlocked for the United States.

Twitter Poll for Next Critical Fundamental Theme After Election Passes

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Poll from Twitter.com, @JohnKicklighter

In the event that the election is indeed decisive – whether Trump or Biden – if the next focus is on stimulus, I will be looking to EURUSD. The second most liquid currency in the world (the Euro) earned a distinct charge in July when the EU joined forces with the ECB to vow an enormous support for the region’s economy. If the US can offset this effort, it could earn a break below 1.1600 – particularly against the backdrop of major European governments shuttering their respective economies amid a Covid resurgence.

EUR/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -28% 5% -5%
Weekly -15% 12% 5%
What does it mean for price action?
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Chart of EURUSD with 100-Day Moving Average (Daily)

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Chart Created on Tradingview Platform

For pairs that look particularly tuned to the Dollar’s retreat, there isn’t much in the way of a combination of wrong-footed speculative positioning and a fundamental bearing that can follow such a line. One pair that is on my radar however should the Dollar be inclined to retreat is USDJPY. Months – and indeed years – of congestion finds the pair better attune for further Greenback losses while the relative haven status can be another fundamental edge to draw from.

USD/JPY MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -3% -21% -9%
Weekly -21% 5% -14%
What does it mean for price action?
Get My Guide

Chart of USDJPY with 50-Day Moving Average (Daily)

Dollar Outlook Depends on the Outcome of a Very Contentious Election

Chart Created on Tradingview Platform

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