Forming an investment strategy based on political factors
Crisis times cause panic among market participants. Trying to save their money, investors turn to cash or safe haven assets. Uncertainty makes them leave the sinking ship. However, a crisis may be a good opportunity for earning money. Why not buy something that got so cheap? The economy develops in cycles; a rise follows a fall and prices will grow, anyway. So, why miss out on the moment?
Even if crises don’t occur often, there may be a situation which has a lot in common with them. I mean growing geopolitical risks. For example, the attacks on Saudi Arabia’s industrial objects in September 2019 and the US-Iran conflict in January 2020 made oil prices soar. Other assets started fluctuating more actively too. Uncertainty and fear of losing one’s own money are the reasons. As a rule, a forecast for this or that currency pair is made in the “if-then” format. If the White House reacts to Teheran’s attack on the US military base in Iraq, then EUR/USD will fall. And vice versa.
The same is true for political risks linked to referendums and parliamentary or presidential elections. For example, ahead of the December 12 vote, Bloomberg analysts expected the pound would rise to $1.34 if the Tories won or fall to $1.23 if the Tories lost.
Forecasts for Pound
Unlike geopolitics, politics has a very important feature that allows forming a skilled investment strategy. It’s public opinion polls. For instance, the growing probability of Boris Johnson’s victory allowed the pound to rally. GBP/USD soared to 1.35; then there was profit fixation because the principle “sell on rumours, buy on facts” was realized.
UK opinion polls
In the example with the pound, the result was exactly the same as expected. But this doesn’t happen often. For instance, few believed that Brexit fans would celebrate the victory at the British referendum. Or that Donald Trump would be the 45th US president. The surprise wasn’t pleasant for the pound while the dollar clawed back losses instantly and grew by the end of 2016. The investors thought that Trump’s fiscal stimulus would speed up inflation and make the Fed raise the rate aggressively.
An important nuance: the pound and the greenback had been growing before the referendum and the elections on the increasing probability that the union of Britain and the EU would continue and Hillary Clinton would win the election based on public opinion polls. The same has happened to the pound lately.
This circumstance allows us forming an investment strategy which will be surely useful ahead of the US presidential elections 2020. A currency stops reacting to any other factors, except public opinion polls, ahead of an important political event, approximately 3-4 weeks before it.
Most likely, if Trump’s popularity continues growing, the USD will continue to feel confident as the president’s current policy has led to strong GDP and foreign trade deficit cut.
Dollar dynamics and Trump’s job approval
Later on, the profit may be fixed if the Republican is re-elected, or the USD index may collapse if Trump’s opponent wins. The presidential election is still far away, but the investors have some time to get prepared. What’s more, political risks may arise in other situations too, so having an efficient strategy at hand would be useful.
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Price chart of EURUSD in real time mode
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