The U.S. dollar, the world’s reserve currency, is having a remarkable comeback. It gained ground against all other major currencies (e.g. EUR, GBP, CHF, AUD, CAD) and it looks poised to strengthen even more.
With only a few weeks ahead of the U.S. elections, the market participants will likely take some risk off the table. This can translate either in booking profits on the trades that dominated the markets after the pandemic reached the Western world (e.g., short USD) or being forced to close some positions because of an increase in margin levels due to the upcoming elections.
In both cases, the USD looks to benefit, especially if we consider that the Treasury is hoarding more USD than the Fed is printing. Hence, the USD liquidity shrinks, favoring an even higher USD.
Straight Line Towards the U.S. Elections
The week ahead is marked by Christine Lagarde testifying in front of the European Parliament and the NFP on Friday. But just like last week’s Powell’s testimony was ignored by the market, the chances are that the same will happen this week with Lagarde. Not even the NFP matters anymore, as the markets focus on the biggest event ahead – the U.S. elections.
The race is tight, and no one knows how it will end. When asked if he is ready for a peaceful transfer of power, Trump did not say yes. Moreover, he thinks it is possible for the presidential race to end up at the Supreme Court. Either one of the two scenarios will add to the market’s volatility, and many traders will be forced to cut their trading positions.
In times of uncertainty, investors look for safety in markets. The traditional safe-haven currency remains the USD, and the recent comeback should be interpreted as such.
The EURUSD eased from 1.20 to 1.16, the GBPUSD fell from 1.35 to 1.28 and the AUDUSD corrected from 0.73 to 0.7 – they all show a stronger USD. Moving forward, higher margin requirements for both currency and stock trading will cause further USD strength. To book profits on the USD short trade, one needs to buy it – the same is true in the case of stocks.
But it could also be that a higher USD is caused by the second wave of COVID-19 infections. Spain, France, Germany, but also the U.K. and the United States, see a spectacular rise in the number of new cases.
If the market participants believe that things get out of control, just as they did in March-April, we could see a similar USD reaction. Back in March, the EURUSD found support at 1.07 area.
Will it find support again?