Though trading activity was fairly light today ahead of tomorrow's historic elections, the markets were not completely void of direction. The dollar and bond market acted strong today, as the equity markets traded with an offered tone suggesting traders could continue to flee “risk-trades” (equities and high-yielding currencies) in favor of the risk aversion vehicles (yen, US dollars, and short-term US Treasuries) regardless of the election results. With that being said, various poles at the close of business on Monday suggest the incumbent party has a long day ahead of them tomorrow. If we see results coming in suggesting the Democratic candidate could secure any one of the following three swing states of Ohio, Florida, and Pennsylvania, a Republican victory becomes unlikely. From here international investors acting on belief of an improved US standing in the global political ring will likely move back into asset classes that have been hammered so harshly in the recent risk aversion environment, specifically the high yielding currencies at the expense of the US dollar. But in accordance to the wave counts we are tracking, this trend is likely to remain only in the near-to-medium term before the longer-term trend and social mood reasserts itself with equity selling and US bond and dollar buying.

Now, should the Democratic party hit the trifecta and secure the house, the senate, and the presidency, I believe the domestic and international investment community will view this as a move too far to the left and the recent risk aversion theme will be accelerated. The outlook for outsized money supply growth, aggressive tax policies, and increased issuance of US treasuries to reflate ourselves out of this financial crisis should put immediate upside pressure on the long end of the US yield curve. The 10- and 30-year bonds should move lower along with US equity prices moving lower. This should put EUR/USD quickly below 1.2300 and into the teens in coming sessions, and depending on hard equities are sold, EUR/JPY should move back below 115.00.

However, should Republicans maintain control of either the house or the senate, I believe equity markets rally, bonds sell off, sending US interest rates higher, driving USD/JPY sharply higher through 100.00 on the way to 102.50.

For tonight, based on the dollar-buying theme we saw today, I am going to put out a one unit short EUR/USD. I am offering a half unit of EUR/USD at 1.2670, another half unit of EUR/USD at 1.2685, with stop losses for the full unit at 1.2720. Take profits are at 1.2585 and 1.2515.



Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

Disclaimer
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.