November 7th and the Dollar

Well aware that the US holds midterm elections on November 7 and that most polls suggest the Democratic Party may garner a majority in the House of Representatives and could get control of the Senate as well, investors have nonetheless taken a favorable look at US assets. The equity market has rallied strongly, with new record highs being recorded in the Dow Jones Industrials and the S&P 500 is posting a double digit gain, with about a third of this year’s gain being scored over the past month, even as a Democrat victory looked more likely. While the US Treasury market has moved lower in recent weeks, it has held up better than the European and Canadian bond markets. The dollar has held its own. The euro has been mostly below its 100-day moving average since the start of October. The greenback recorded its high for the year against the Japanese yen on October 13th just below JPY120.

The Dollar Saga: Where we are now

The US dollar’s price action in recent days has been significant. Essentially, this week’s developments indicate that the greenback’s recent advance is probably exhausted and a new period of weakness will likely unfold. Yet to be clear, in the bigger picture, what we are talking about is a move from the upper end of its 5-6 month trading range to the lower end.

For the euro, this translates into gains in the coming sessions toward $1.2700-50 and $1.2900 in before the end of the year. Buying on pullback backs now rather than selling rallies will probably be the preferred tactic of short-term players. Support is now seen in the $1.2580-$1.2600 area and only a break of $1.2550 would jeopardize this constructive outlook.

Is the Dollar Still Range Bound?

The last several weeks have been particularly difficult for short-term players in the foreign exchange market. Many have been chopped up as narrow ranges have prevailed—selling lows and buying the highs betting on a breakout which did not materialize. The US dollar appeared to break higher after a knee-jerk drop after news the job creation in September was less than half what the consensus expected. The greenback’s gains pushed the euro to its lowest level since late July and recorded its best level against the Japanese yen since mid-March. The next key levels are seen near $1.2560 and JPY120. A convincing break of these areas warns of near-term scope for another big figure dollar advance—toward $1.2450 and JPY121. That said, the greater risk to traders is betting now that a convincing break has taken place, and instead, when the dust settles, the dollar may still be stuck in a range, even if frayed.