The FX Reaction to US Election

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Market Drivers November 6, 2012
RBA surprises keeps rates on hold
EUR PMI slides to 46.00 UK MP/IP misses
Nikkei -0.46% Europe 0.53%
Oil $85.62/bbl
Gold $1688/oz.

Europe and Asia:
AUD HPI q/q 0.3% vs. 1.1%
AUD RBA Rate Decision 3.25%
EUR Final Services PMI 46.0 vs. 46.2
GBP MP 0.1% vs. 0.3%
GBP IP -1.7% vs. -0.6%

North America:
CAD Ivey PMI 10:00

Risk FX remained steady in Asian and early European trade boosted by uptick in equities and a surprisingly hawkish stand by the RBA. The Reserve Bank of Australia surprised the market by keeping rates steady at 3.25% sending the Aussie dollar through the key 1.0400 barrier in mid morning Asian trade. Ahead of the announcement 20 out of 27 economists surveyed by Bloomberg forecast that the RBA would cut rates by another 25bp to 3.00%.

Instead, the RBA statement reflected a much more hawkish tone than the market anticipated with the central bank noting that inflation was slightly higher than anticipated while the outlook for global economy was more positive with growth in China stabilizing. “With prices data slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being,” said Glenn Stevens. governor of the RBA.

One possible reason for RBA’s caution on the interest rate front is the pickup in demand in Australia’s housing market. Last month the country saw a strong jump in Building Approvals to 7.8% from 1.1% eyed and monetary officials in Sydney may have decided that they did not want to fuel demand further given the fact the most of Australian mortgages are based on floating rather than fixed interest rates.

Meanwhile the news from Europe was not nearly as sanguine with EUR PMI slipping to 46.0 from 46.2 originally eyed as the region’s economy recorded its 6th consecutive month of contraction. The only bright spot in the report was a pick up new business component to 44.7 from 43.8 in September indicating that the slowdown may have plateaued.

In UK the Industrial Production and Manufacturing Production reports also missed expectations with IP declining particularly sharply to -1.7% from -0.6% eyed. However the big miss in IP was primarily due to record breaking decline in oil and gas exploration which has minimal impact on UK GDP and cable shrugged off the news trading steady around the 1.5980 level.

Although US elections generally have minimal impact on currency trade, today’s choice does pose a stark contrast in one arena. Mitt Romney has clearly stated that he would favor a more restrictive monetary policy, announcing that he would fire Ben Bernanke if given a chance. President Obama on the other hand is viewed as continuing the status quo which has been highly accommodative to risk assets. Therefore as the day proceeds and investors see the exit polling data from key swing states, FX could experience some volatility. If President Obama wins as most forecasters predict, expect a mild rally in risk with Aussie in particular eyeing the 1.0450 level and beyond. If however Mr. Romney looks to score an upset, the dollar may see a sharp rally with EURUSD selling off through 1.2750 while USDJPY may reclaim the 80.50 figure on anticipation of higher US yields.

Boris Schlossberg
Managing Director

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