Post Election Volatility Fails To Impact The USD

Includes: FXA, FXE, FXY, UDN, UUP
by: Ralph Shell

Equities markets took a tumble in the U.S. yesterday. Some want to attribute the sell-off to the U.S. election. Granted, these remarks did not originate with Obama supporters, but the assessment may be a partial explanation for the lower market. Rich Ackerman at Zero Hedge had these comments:

The Dow plunged 313 points yesterday, but don't believe news media reports that it was the nearness of the "fiscal cliff" that caused the sell-off. What spooked investors is a bigger picture that recognizes the economically catastrophic implications of a second Obama term... We're not going to dwell on the choice Americans made on Tuesday. Suffice it to say, the election has substantiated conservatives' worst fear -- that, sooner or later, Big Government's clients would come to outnumber those of us who pay for the criminal extravagances of their voracious welfare state.

Now, with a $16+ trillion federal deficit that is growing by more than a trillion dollars per year, the nation's descent toward insolvency can only accelerate, further widening the gap between tax revenues and outlays. Soaking the rich, even by taxing them at 100%, would not begin to arrest the decline, but just try to tell that to those who voted for Obama. Bread and circuses will be their reward...

Certainly, there is a large segment that continually worries about the growing deficit, but there may have been some other concerns yesterday that also had a negative impact on the equities markets. In Greece, with demonstrations continuing outside, the Greek parliament was inside voting on austerity and budget reduction plans. By a narrow margin, the austerity budget passed. Now the Greeks should receive their next $31.5B tranche of bailout funds, which will keep them solvent for awhile.

Today's ECB meeting was another market worry. President Draghi acknowledged that the economy, even in the prosperous north, was slowing. Inflation was not a problem, but the bank rate would remain at .75%. Draghi reminded markets that the ECB remains ready to be a lender of last resort should Spain or another country be ready to turn over their budget process to the infamous troika.

Currency market traders can worry about the U.S. fiscal cliff, the Washington big spenders, and the Fed's easy money, but at least they know what they are getting. Familiarity, even with those whose policies you disagree with, might be a better alternative than the unknown results coming from the eurozone.

Perhaps this is why the euro keeps losing to the USD. (EURUSD, FXE, UUP) We had expected the pair would find some support around the 200 day SMA of 1.2840. Such was not the case, as we now trade at 1.2747. Support now is only a guess, maybe the 1.2650 area?

Most European equity indexes were lower today, and the U.S. markets are continuing that trend. The global weakness may have revived some buying in the Japanese yen (NYSEARCA:FXY). The yen had weakened to 80.67 to the USD, but has since appreciated to 79.70. This buying may be the result of the perceived safe haven status in the yen, or it may be from specs who have accumulated a big yen short position and are getting out.

Economic news from Japan is not constructive, however, and some experts think Japan is going into a recession. This morning, the Japanese Economic Survey had a 39 rating, down sharply from 41.2 last month.

Contrast this to the Australian economy, which reported new employment of a larger than expected 10.7K, and an unemployment rate of only 5.4%. Earlier in the week, the Reserve Bank of Australia kept the bank rate unchanged at 3.25%.

The good economic news in Australia has failed to halt Aussie weakness versus the yen. That pair AUDJPY has sold off from a high of 84.15 to a trade of 83.15. Most likely, this is mob "risk off" mentality. Should the U.S. equity market, currently down -- currently a minus 65 on the Dow as of this writing -- go into a late session tail spin, this might set up a decent entry point for a long AUDJPY position. The 82.30 looks like a good entry, but reaching 30 or 40 pips will give you a better chance of a fill. It takes some nerve, but having a plan and fading a market during panic selling can work out well.

(click images to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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