Notice the predicted slope of the relationship between U.S. debt limits and gold (see “Pay me in gold”). Understanding this is the key to shaping the U.S. election week trading strategies. The relationship between USD/CHF and U.S. debt limits is similar. As U.S. debt limits increase or expect to increase, the dollar should weaken. That is exactly what has happened. The strength of the relationship between the USD/CHF and the U.S. debt limits is not as great as with gold, but the direction is inverse as predicted (see “Follow the money”).
This leads us to two scenarios for the impact of the U.S. election. First, if Romney wins, it will have a bearish impact on gold as expectations will shift toward a decline in the rate of growth of U.S. debt. A Republican win will be negative for further stimulus because Republican public policy will shift toward reduced spending and replacement of Fed Chairman Ben Bernanke. If Obama wins, the expectations for growth in U.S. debt as well as further stimulus activity will increase. The result will be bullish for gold.
Traders therefore can play these scenarios by going long gold instruments or going long USD/CHF spot, futures, plain vanilla or binary options
However, take a close look at the positions of both candidates and you are hard pressed to see deficit reductions. If we have a change at the top, the GOP’s position on stimulus likely will change. So, once markets react to the election, it will be best to follow the size of actual debt rather than political promises.