The US presidential election is less than a week away, and the markets remain in ranges, as we largely anticipated for more than a month now.

 

However, this time the outcome doesn’t seem to be as binary for markets, as in the 2016 election. But even then, if you remember, it was expected that the dollar will crash if Trump wins, which initially happened but reversed only a few hours later on Trump’s victory speech in which he announced a big plan to jump-start the economy via tax cuts and deregulation.
 

This time, it seems it’s even more tricky to call how the dollar would react. There are a range of possibilities, from a clean sweep Biden win, to a close Biden win, a contested election (neither candidate admits he lost), or a close Trump win. Still, it seems a Trump win should be the most positive scenario for the USD again, though any USD strength post the election is unlikely to last more than a few months. At least that’s how things stand from the current perspective.

 

 

On the other hand, a Biden win is likely to be moderately negative for the dollar, mainly driven by his globalist policies and tightening regulation on businesses. Biden should also be positive for risk sentiment as he will likely tone down the trade wars, but this would erode the safe-haven support for USD, which it received for 4 years under Trump. More regulation imposed on business also means that the US economy will be slightly weaker under Biden than Trump, which is ultimately likely to prove a headwind for the US currency as well.

It’s worth saying that the polls are putting Biden clearly in the lead (9-10%), which makes him the most probable winner. This is unlike in 2016 when Trump lagged Clinton by only 3-4 percentage points heading into the election on November 9, 2016. And it’s also worth reminding everyone that Trump actually lost the popular vote by almost 3 million votes in 2016 and it was the electoral votes that enabled him to win the election.

 

If you want to trade the event, it would probably be best to wait for the results and only trade after a clear outcome is known. We’ll follow up with an analysis of the results in next week’s newsletter and any potential trading opportunities that may be created from the election.
 

Let’s now turn to a potential trading opportunity on the NZDUSD pair based on this head and shoulders setup, which may as well get triggered right on election night.

The price has drawn the pattern nicely on the daily chart with distinct support at the neckline at the 0.6550 price area. A breakdown here should open the way toward the 200-day moving average (red line on chart) and toward the 0.6350 target projection of the H&S pattern.

It’s a very clear setup and already known to most traders, so we only need to wait for the breakout and then look to join the move. It will be best if this breakdown occurs on some post-election USD driven strength, maybe via a Trump win or a risk-off reaction across markets. 

Though, as we said above, a Trump win is unlikely, so this is what clouds the outlook for NZDUSD at this point. In the end, the neckline support may hold, and this setup may not get triggered at all. This is why it’s crucial to wait for the breakout before entering a trade based on a head and shoulders setup.

 

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