It’s the first week of November, volatility is high and theirs a plethora of potential catalysts driving the AUD Dollar at its current time. With mid term US elections looming on the large investors minds, this is creating a trading environment that can be interpreted as ether a traders nightmare or playground. For the traders looking for another point of view, our team have got you covered as we dive right into technical Tuesday, going over the points that matter.
So as we opened with, this week we have many fundamental drivers in play which you can view on our Forex Economic Calander. To start with in a few hours time of writing we have the monthly AUD RBA Cash Rate Target figures announcing which is a high impact event. The Reserve Bank has extended its record hold of interest rates at the emergency low setting of 1.5 per cent to 25 months and the forecast is that it will be unchanged again today.
Secondly mid term elections are probably the highest catalyst for uncertainty in investors minds and we are going to discuss this in depth for you now before going into the technical.
Mid Term Election Scenario Analysis.
If the Democrats do take the House, there are several likely outcomes. The first will be more gridlock in Washington, with fewer new laws being passed. This could be both good and bad – depending who you ask. Fewer legislative changes could mean more certainty, something investors like.
Trump and the GOP will have a hard time introducing new tax cuts or making the last round of tax cuts permanent. Some analysts even think it’s possible some tax cuts would be reversed.
Trump would also struggle to ratchet up the trade war with China, which may put his whole trade strategy in jeopardy. This would have implications for global markets, and in particular for emerging markets.
A Democrat-controlled House would probably lead to new investigations into Trump, his campaign and his business interests. The topic of impeachment may well come up to, though it would be unlikely to go very far as any verdict requires the support of 67 senators. It’s also believed that Robert Mueller will announce his findings on alleged collusion between the Trump campaign and Russia.
And Finally, large gains for Democrats would turn attention to the 2020 election and the chances and implications of the Dems taking the Senate and White House.
Of course, this is all assuming the results are in line with the polls. There are two possible surprise outcomes, namely the GOP keeping both the House and Senate or the Democrats winning control of both. Because both scenarios are unexpected, they would lead to large reactions from the market.
As far as markets are concerned, the midterm elections aren’t taking place in a vacuum. Investors are concerned about the trade war, interest rates, valuations and the sustainability of earnings growth.
The US Dollar
The USD has been major bullish for most of the year, in part at least because of the trade war. A Democrat-controlled House would stand in the way of further escalation of the trade war, and potentially reverse some of the previous measures. Many analysts believe this will lead to USD weakness, although one would expect that to some extent this would be priced in by now.
Gridlock in Washington may also stall further tax cuts and possibly even slow government spending, both of which could also lead to USD weakness.
If the republicans aka GOP does happen to retain control of the House, we can expect a strong rally in the USD as this is the result that is probably not priced into the market.
So how can we trade it?
in usual technical Tuesday fashion we will now run you though some potential scenarios based on what the charts are saying to us. please keep in mind than the fundamental news is most likely going to be a catalyst of break up or down for the AUDUSD but it cans till leave clues to what the big players and institutional traders are all doing.
Breaking down the AUD/USD Daily Forex chart, we can tell that on the 1st of November we had a monster rally up into our descending price channel – this is indicating to us as traders that there is heavy momentum going in one direction and that the bulls have control. Looking back even further we can actually account to see a double bottom forming indicating that the bears might be out of gas.
Zooming into our highlighted box, we can tell that price action has actually approached the weekly key area zone and given us a bearish pin-bar which pierced the top price channel. This is indicating that price is over done at that area for the time.
The weekly candlestick however if we take a look at it closed bullish but not in a convincing fashion. This may indicate potential further upside in the future, however in the immediate future I will be looking for a slight correction in price back into the 0.71500 area and look for any reversal signals from there if the channel holds.
Keep in mind the political nature of this week will determine if the Australian Dollar will rally or continue its decent into the guarded sub 0.7000 zone.
Over to you, let us know below what you think about the current state of the market.