Conditions rapidly changed since my last Above the 40 post describing the historic territory for overbought conditions. Bad and good news headlines are battling for mindspace where a new more virulent strain of coronavirus threatens to undercut what could have been market cheer from the new pandemic relief in the U.S.
Distress from a New Strain vs New Pandemic Relief
From Europe, a new coronavirus strain in the UK triggered a rapid quarantining of the United Kingdom (UK) from the rest of Europe. European stock markets are dropping, and the U.S. dollar is gaining rapidly against the British pound (EUR/GBP) and the euro (EUR/USD).
In the U.S., Democrats and Republicans finally came to an agreement on a coronavirus relief bill to send to Congress for approval. The dueling parties also barely averted a government shutdown with a fresh spending bill.
So far, the negative news is understandably winning. This new coronavirus strain is a reminder that the pandemic may yet throw the planet into fresh loops, expense and misery before global populations get to sufficient immunity levels from the vaccinations that launched last week. A drop in the Australian dollar versus the Japanese yen (AUD/JPY) tells me everything I need to know about the likely weak start for pre-Christmas trading in the U.S.
The Trade
Being the contrarian, I consider the rapid drop in the British pound as a short-term buying opportunity. The rush to sell looks like a quick trigger reaction greased by the latest deadlock in Brexit negotiations. Trading in the British pound has been very choppy for almost a month. I am also looking to accumulate fresh short positions against the U.S. dollar across a range of currencies.
Be careful out there!
Full disclosure: long GBP/USD, short GBP/JPY, long EUR/USD, long AUD/USD