If you are long stocks, it hasn’t been an easy year. Equities are down across the globe and there are countless reasons for why stocks could fall further. Making money in equities won’t be easy with China, Russia, the Middle East and Britain giving everyone reasons to be nervous.
But we found one market where money can be made easily…and that is currencies.
Since currencies are traded in pairs, there’s never a bear market. Think about it: when one currency is rising, another is falling. Just imagine the Euro / U.S. Dollar pair – if the euro is rising, the dollar must be falling and vice versa. There’s no uptick rule in Forex, so if markets crash, it is relatively easy to get in and out of long and short currency trades.
Now, as interesting as that may be, it is not the only reason why we think money can be made in currencies this year. You may not know this, but currencies are particularly attractive to trade during an Election Year.
With the Iowa, New Hampshire, South Carolina and Nevada primaries behind us, the 2016 election season is in full swing. And while everyone is passionately focused on the momentum of the front runner and their favorite candidates, we on the other hand, are focused on finding the right opportunity to buy the U.S. Dollar.
There’s an undeniable pattern in how the U.S. Dollar trades during an election year and believe it or not even with the political uncertainty election years are good for the dollar.
To prove this point, we had our number cruncher’s put together a table showing you exactly how the Dollar Index performed in the last 10 election years which spanned a 4-decade period. As you can see, the index rose eight out of the last ten cycles, which means that in the past 40 years, the Dollar appreciated 80 percent of the time by an average of 7%. AND… in one of the two election years that the Dollar Index declined, the greenback lost only approximately 0.5% of its value.
Now the same pattern can be also seen in the Euro / U.S. Dollar (EUR/USD) currency pair. Eight out of the last ten U.S. election years the Euro declined by an average of -7%. EUR/USD fell regardless of a Republican or Democratic victory. Of course, the EUR/USD’s decline can be largely attributed to U.S. Dollar strength; but this is a year where the Euro could also add to the trade.
There’s very little rhyme or reason to why the Dollar tends to perform well during election years…outside of a similar patter seen in the S&P 500 but ultimately how the dollar performs has a lot more to do with the broader economic backdrop.
The year has already begun but EUR/USD is up, while the Dollar Index (DXY) is down and that screams of an opportunity. We are not telling you to sell Euros or buy Dollars, but history often repeats itself and we see an incredibly strong chance of that happening in 2016 since it is such an incredibly challenging year for Europe.
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Between the slowdown in China, the risk of Britain leaving the European Union, the unstable geopolitical situations in the Middle East and Russia, high unemployment, stagnant wages and low productivity, we don’t see any possibility of a recovery in the EZ. The population in Europe is aging, and with debt to GDP levels above 100% for some countries, they won’t be able to handle the greater public spending that is needed to properly process refugees, build borders and fend against terrorism.
The European Central Bank has made it very clear that they are looking to provide additional stimulus to the economy, driving down the value of the currency. So while stocks may go up and down, currencies may head in one consistent direction.
Until next time,
Ms. Kathy Lien is the Managing Director and Founding Partner of BKForex’s strategies and is also the Co-Editor of Global Currency Investor (GCI), published by Weiss. Kathy, a leading currency and Forex expert, started the #1 Forex news site DailyFX.com, is a regular contributor to CNBC Squawk Box and is a former host of CNBC’s Forex show, Money in Motion. She is also an internationally-published author of the best-selling book, “Day Trading and Swing Trading the Currency Market” (now in its third edition) and “The Little Book of Currency Trading.”