Impact of US elections and Trump presidency on Forex, CFD and other financial markets
The US Presidential Elections showed a very close and tight race...
…the polls forecasted a win for Mrs Clinton (Democrat) but Mr Trump (Republican) surprised the pundits by quickly taking the lead and eventually winning.
What does a Trump win entail for the markets?
What can investors and traders expect in the upcoming days, weeks and months?
In our previous article on the possible impact of the US elections, we addressed scenarios of a Trump victory...
…but now we are expanding it with a full overview of the upcoming Trump presidency and its impact on Forex, CFD, commodities, stock indices and other financial markets.
Consequences of US elections for US and global politics
It was clear from the start that traders (and voters) needed to be ready for a lengthy election night…
...one that would remain close and exciting throughout.
Although major pollsters estimated Clinton's chances of winning at 65-85%, the political reality changed drastically between 3 and 4am GMT as Trump steadily saw his chances of winning the presidency climb from 20% to over 95% ( NY Times predictions).
The big surprise of the night occurred when Trump won MidWest states (Wisconsin, Michigan, Pennsylvania) that were expected to remain on Clinton's side.
These states are also known as Clinton's "blue (Democratic) wall".
Although Mrs Clinton won the popular vote, Trump collected sufficient electoral votes to win the presidency.
The Republican Party has emerged as a clear winner too:
…not only did they win the presidential race but also the Senate and the House (keeping the Republican majority).
…politics 'as usual', corrupt politicians, continued globalisation in its many forms and expansion of free trade needs to be changed.
In fact, after the Brexit vote where the UK voted to leave the European Union, it does not seem to be an American message only…
...but rather a global message, which seems to be gaining in volume and intensity.
What does this mean for the US?
- Trump has a Republican majority, which means he can start working on his agenda from day 1 without political obstruction.
- For Clinton and the Democratic Party, the night developed dramatically when the actual results started to diverge from the exits polls prior to the election.
- With a 2016 Republican victory across the board, the Democratic Party will seriously need to reflect on their party's future direction.
The world will be watching the next steps very carefully and nobody knows what Trump will prioritise…
...though repealing Obamacare, filling in Supreme Court vacancy, repealing many executive orders of Obama, focusing on improving the economy and scrutinising trade deals seem likely candidates.
A Trump presidency means a reset button for the US relationships with the world as well as a shift in some of their foreign policy and many of its economic, national and fiscal policies.
Therefore, the main questions for traders and investors will be how the economy and the markets will react.
These are trends to keep an eye on:
- Who will Trump choose in his cabinet?
- What messages and policies does Trump communicate before the inauguration in January 2017?
- What will Trump focus on during his first 100 days?
- Where and when will Trump want to (re)negotiate new trade deals? How will countries respond and react?
- How will the economy behave in terms of consumer spending, CPI, inflation, business spending, jobs growth, unemployment, consumer sentiment, trade balance?
- How will the markets perceive Trump's actions and his policies?
These questions will need to be monitored closely before new expectations and forecasts can be derived.
Generally speaking, however, Trump's tax, fiscal and economic policy should be expansionary and bullish.
In the short-term, we expect this to lead to the US economic and inflation growth, which should provide sufficient reasons for the Federal Reserve (Fed) to increase the interest rate.
Maybe it won't happen immediately in December this year…
...but most likely in the first half of 2017.
In the medium-term, a Trump administration might need to address a few questions like these:
- How much debt is added in the medium term?
- Could there be any bubbles arising from it?
- Will it sufficiently spur long-term economic growth?
- Will global trade run into strong head winds?
Consequences of Trump win on the global financial markets
At first, the prospect of a Trump win triggered, as we have expected, weakness in the US and global stock markets, the US Dollar, global commodities (except Gold and Silver) and emerging markets.
Perhaps, investors perhaps feared more market uncertainty with a Trump win, who has stated to be critical of trade deals and current trade agreements.
According to CNBC, this could trigger a trade conflict.
The financial markets, however, rebounded the same day and completely reversed the initial losses to close bullish on the US Dollar and many stock indices.
It is time for a closer look on some of the asset classes.
US elections and the US Dollar
As the election night progressed and Trump's chances for a win steadily increased, the US dollar quickly adapted and reacted:
- the EUR/USD saw a strong and steady surge emerge as the US Dollar weakened significantly, with price climbing above 1.11 and eventually reaching 1.13
- the same USD weakness was visible in the USD index and versus other currencies like the Japanese Yen (JPY), which saw price plummet below 102 from a high of 105.50.
But the US dollar made a remarkable comeback and quickly gained value against a basket of currencies including the Euro and Yen.
One of the main reasons could be the expansionary fiscal and investment policy that Trump has announced, which could spark short-term economic and inflation growth.
The higher inflation expectations might reduce the burden on the shoulders of the Fed (Federal Reserve) and provide a clear trigger for the Fed to increase the interest rate…
…which could finally kick a wave of 'normalising' the interest rates and, in turn, spark a further strengthening of the US dollar.
From a technical point of view, the US Dollar index closed with a strong close near the candle high and a large wick at the bottom.
This indicated strong bearish momentum during the trading day but an even stronger bullish push back and close.
The US Dollar was not the only financial market to react with volatility.
The US stock market, emerging markets and oil followed the same path as the US Dollar and made impressive twists and turns.
US Elections on Mexican Peso and Russian Ruble
Despite economic data from Mexico looking reasonably sound, with unemployment at 4.1%, inflation at 3%, and reasonable government debt to GDP ratio at a modest 43.2%, the MXN has continued its devaluation, most notably in the last 18 months.
The uncertainty and the downside to the Mexican economy with a Trump administration has hurt the MXN…
...with Trump's plans to deport illegal Mexicans residing in the USA back to Mexico, building a wall along the border at the expense of the Mexican Government and introduce hefty tariffs on Mexican exports to the USA.
I expect the bullish move to continue.
All camarilla targets have been broken and as a great alternative we added exclusive monthly pivot points.
Traders might be looking for buying into dips around 18.40 towards 21.00, 22.20 and 23.60.
Alternatively, the break of long-term trend line (yellow) around 18.00 could be used for buying into dips around S2 -17.00, S3 - 15.80 and double trend line support at 15.00.
If sanctions against Russia are lifted, which may happen in next 6-12 months, we reckon the USDRUB will drop to 40-35 range.
It could be a massive move and shock to the Forex market.
US elections and gold
Gold was steadily on the rise as investors braced for a Trump win.
Gold is known as a safe haven during uncertainty...
...and during the US elections when Trump gained a lead with his promise for new policies and reforms, most risky asset markets like equities and commodities went into major meltdown.
The exception was the flight to safe haven markets, as gold was showing bullish price action since mid-October.
It peaked at USD 1337/oz for the day.
At one stage, the gold price was a whopping 5.4% up from the day's low, forming a large master candle on the daily chart.
While equities recovered most of the rot later in the trading day, risk-off sentiments may re-emerge as Trump's trade protectionist policies are likely to hinder global trade.
Hence it is likely that we may see some temporary movement of funds back into the safe haven market of gold in coming weeks.
Trump being elected President is also likely to cause the US Fed to keep rates on hold as the new government forms, and this should offer some price support for gold in the interim.
I expect gold to remain in a sideways market with price support near the camarilla PP 1255.50.
If equities continue with their bullish revival, then look for weakness in gold, with the next L3 camarilla PP at 1230 as a likely price target.
If equities experience a panic leg south, which is unlikely in my opinion, then expect gold to continue upwards, with the first price target of 1337 (US Election day high)...
...and even 1375 as the next extension target with a trend line resistance.
US elections and oil
Before the elections Trump has promised to open all federal lands and waters to fossil fuel production. His open stance on drilling would add to the nation's glut of supplies—and pressure
oil prices.
We think that the bearish pressure will remain steady with the range between 46.00 and 43.00. Break of 43.00 below should target 41.00 and below it could extend to 36.60.
Pullback toward 50.00 (yellow POC zone) could be used for new positional short trades.
US elections and Dax
During the peak of the risk-off sentiment, the Dax dropped to a low of 9,966 pts during the US election vote count…
...to an equivalent of -6.2% for the day.
During the same time frame, most equities across the globe plummeted.
However, most stock markets shrugged off the Trump victory, producing a strong hammer on the Daily TF.
As the Dax has now cleared the upside resistance on the Daily TF, it appears that momentum is to the upside with the previous highs, its next target around the 10800 level followed by 11175.
The strength of the USD also returned after the election results, and this is good for German exporters to the US market, and positive for the Dax overall.
Nonetheless, historically the day after the US election results are confirmed, it usually results in profit taking and a pullback in stocks, so this should represent a buying opportunity if this prevails.
Buying opportunities might come around yellow POC zones.
Watch for trend line breaks and fibs as targets along with camarilla PP.
Conclusion
As for the financial markets, they seem to be factoring in media hyperbole over Trump's inflammatory language.
I want to believe we will find his bite not as vicious as his bark.
In a long-term, he has promised to deal with the two things that are threatening to become a mortal danger to the US – namely, corruption in government and government debt.
It may take several months for the financial markets to digest this.
When they do, there will be two opposite reactions.
The dollar will strengthen at first, partly due to its safe haven status…
...but later on due to a rise in inflation and interest rate hikes.
The flight to dollar-denominated assets will continue.
This will be in response to the realisation that corruption and manipulation are being reigned in.
At the same time, in the medium to long-term, the US debt will be less attractive due to its size and potential danger of "restructuring".
All in all, we will have to wait and see.
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