USD Can’t Profit From Rising US Yields – Next Leg Down Ahead?

Tuesday evening US President Donald Trump tweeted that he told his administration's negotiators around US Treasury Mnuchin to end their current coronavirus stimulus talks with Democrats until after the US presidential election on the 3rd of November.

Unsurprisingly, the US-Dollar initially caught a bid, rising against the Euro or Pound Sterling, but dropping against the JPY, going hand in hand with a drop in US yields.

Not even 24 hours later, the Euro and GBP had recovered their losses while 10-year US yields rose again and USDJPY gained bullish momentum – what does this all mean ahead of the upcoming US election?

USD bears waiting for the Fed to deliver

In our opinion, we have to look at different aspects and developments here

• The timing of Trump's tweet: it came just hours after US Federal Reserve Chairman Jerome Powell highlighted the need for more fiscal spending to help the economic recovery.
• After recent economic data from the US, which showed that a large stimulus package is needed as some US states are struggling with new lockdowns
• The latest US employment data saw a drop on the one hand, but also pointed out that out of more than 22 million jobs lost in March and April due to the Corona lockdown only around 11.3 million have been recovered so far

Trump is certainly not helping his chances of getting re-elected on the 03rd of November by withholding economic aid to some of his main voters.

While it is still not clear what Trump's intentions are behind this move, it seems as if market participants, especially traders of the US-Dollar, are expecting more monetary and fiscal stimulus soon.

One reason for that assumption can be found in the relative weakness of the Greenback despite the recent push higher in 10-year US yields, which left yields trading at its highest levels since June.

While you usually expect a currency to profit from rising yields, failing to do so points to relative weakness, in our opinion, and market participants potentially anticipating a move from the US central bank.

In fact, the Fed could take the developments around the Corona relief package as fundamental for further monetary stimulus and balloon its balance sheet significantly beyond 7 trillion USD, leaving the US-Dollar vulnerable for another leg lower.

Still, there is one thing to note, especially when looking at the US presidential election: while we expect further USD weakness with US yields to be expected to fall lower, the first 100 days following the election are usually USD bullish – no matter who wins.

However, the USD performed better following Democratic wins, rising on average 4% vs. rising 2% after a Republican win (note: the USD's performance here relates to the Fed's trade-weighted nominal advanced foreign economies dollar index).

How should you trade the US Dollar Index in this environment?

When looking at the daily chart, we can clearly spot a sequence of falling highs and lows with the USD Index finding a potential short-trigger around 94.70 and slightly higher around 95.90/96.00 points.

In general, we can say that the Short sequence and bearish mode in the USD Index will remain as long as the Greenback trades below 97.70 points.

So, shorting the USD against 94.70 with a stop at 97.70 and, thus, a risk of 300 points while aiming for a break of 92.00 and minimum test of the region of the 2018 yearly lows of around 88.00 points delivers a risk-reward ratio of around 1 to 2.

Longer-term, we could imagine the USD Index going for a run to as low as its Great Financial Crisis lows in 2008 around 70.00 points:

(Click on image to enlarge)

Source: Admiral Markets MT5 with MT5SE Add-on [USDX] Daily chart (between June 04, 2019, to October 12, 2020). Accessed: October 12, 2020, at 10:30 AM GMT. Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of USDX increased by 8.7%, in 2016, it increased by 3.6%, in 2017, it decreased by 10.7%, in 2018, it increased by 4.2%, and in 2019, it increased by 0.4%, meaning that in five years, it was up by 5.8%.