The Election Whipsaw Caught Many on the Wrong Side of the Market. The Pound is Ripping While the Yen is Slipping
Eric Furstenberg • 3 min read
Market players expected a victory by Hillary Clinton. What a surprise they got when Donald Trump took the lead after lagging behind (in terms of votes) for quite a while. When the financial world realized that Trump was going to win, it responded with a large risk-off move. Equities sold off dramatically, large amounts of money flowed into safe haven assets like the Japanese Yen and gold. The US dollar weakened significantly against all of the major currencies, except the Canadian dollar and the Australian dollar. These two were even weaker than the dollar because as commodity currencies they are especially vulnerable to decline in risk-off moves. The Japanese Yen, Swiss Franc, British pound, and the Euro gained massively against the dollar in a very short period of time. For example, the Yen gained more than 400 pips against the dollar in only a few hours’ time.
However, investor sentiment quickly turned around from risk-off to risk-on. These exacerbated moves soon reversed, and a few of these currencies even ended up losing more ground against the US dollar than which they initially gained. One such currency is the Euro. Let’s have a look at the EUR/USD:
EUR/USD Hourly Chart
Here you can see the massive Euro-pop on Wednesday. It is obvious that many long traders were caught on the wrong side of the market. Many of these traders were forced out of their positions when the market reversed sharply later in the day. This is why I never rely solely on fundamental analysis to make trading decisions. Many times the market either overreacts to fundamental catalysts, or it ignores it. Sometimes there is a reaction to a specific catalyst, but far weaker than expected. Can the market ever price in fundamentals effectively? Technical analysis, on the other hand, is a much better way to gauge where the market is heading. It is updated more frequently, which means that we can quickly see if something really important has happened in the market. For example, if someone has a short position running on the EUR/USD, and the price is gradually moving lower, the appearance of a very large 5-minute bullish candle of let’s say 60 pips, would really concern the trader. This could signal a trend reversal, or that a very sharp correction might be on the way. Here is a daily chart of the EUR/USD:
EUR/USD Daily Chart
The EUR/USD surely appears very negative at the moment, and many traders who bought into the initial bounce were stopped out when it reversed. This liquidation of positions just added momentum to the sharp selloff that followed the initial bounce. The outlook for the pair remains negative for now, and perhaps we might encounter some good opportunities to sell it over the next few days.
Through all this week’s turmoil and volatility, the British pound has performed rather well. Whereas the US presidential election really punished the Euro, it actually helped the pound to gain some more ground. Look at this daily chart of the GBP/USD:
GBP/USD Daily Chart
On Wednesday there was a lot of chop on this pair, but on Thursday the pound solidly outperformed the dollar. There is certainly a lot of underlying strength in the British pound, and the GBP/USD and other pound pairs could definitely offer some excellent trading opportunities in the near future. The GBP/USD posted a good strong day on Thursday and rose about 147 pips.
This pair also reversed its initial losses which it incurred on Wednesday. Look at the following chart:
USD/JPY Hourly Chart
We’ve really seen some big moves in the FX market this week! Where there is market movement, there is money to be made, and increased volatility can bring you to your targets faster.
Notice how the 20-EMA (the blue moving average) started to act as dynamic support soon after the price broke through it. The area is marked with the red rectangle in the chart above.
I’m excited about all the volatility, and we might get some tradable follow through in the next few days. Perhaps we might get some juicy pullbacks to the 20-EMA on an hourly chart, for example. Just make sure that the market is still forming higher highs and higher lows if you decide to enter long.
For all practical reasons, we don’t have any important economic data releases scheduled for tomorrow (Friday). There is a speech by Mr. Poloz of the BOC (Bank of Canada) at 15:50 GMT which could cause some market movement, but I doubt if we will see a lot of action resulting from it.