FX Traders are Excited About Moving Beyond Election

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Daily FX Market Roundup 11-06-12

FX Traders are Excited About Putting the Election Behind Us
EUR: Weaker Data Will Prevent Any Optimism from ECB
GBP: Wave of Weaker Data
CAD: Shrugs Off Weaker IVEY
AUD: RBA Keeps Rates Steady
NZD: Sharp Rise in Oil Prices, Gold Up
JPY – More talk of Easier Monetary Policy

FX Traders are Excited About Moving Beyond Election

Gains in currencies, equities and commodities reflect renewed excitement in the financial markets but with no major U.S. data on the calendar, only one event can drive this amount of enthusiasm and that is the U.S. Presidential Election. While investors are excited about finding out who will be the next President of the United States, they are more eager to put one of this year’s greatest uncertainties behind them. With the economy being the central focus of this election, tonight’s outcome will give us a clearer sense of how fiscal and monetary policy will be managed over the next 4 years. The hope is that America will finally be able to move on from the political gridlock that inhibited progress on key issues such as the fiscal cliff over the last year.

The price action this Election Day was very similar to 2008 when gains were seen in the EUR/USD, USD/JPY and stocks. Therefore if President Obama is reelected, we could expect to see the same sell-off in the days that followed. Mitt Romney’s policies are generally more positive for the dollar than President Obama’s but its debatable who will do a better job turning the U.S. economy around – only time will tell. Intrade currently puts the odds of reelection for President Obama at two to one. If Obama wins, we expect equities to sell-off and USD/JPY to weaken on Wednesday. This has nothing to do with how Americans feel about the President because even after his historic win in 2008, equities and currencies still reacted negatively. The reason is because Obama plans to increase taxes on the wealthy and punish multinational companies for shipping jobs overseas. There’s also a 95% chance that he will keep Ben Bernanke as head of the Federal Reserve and we know that helicopter Ben has no qualms about keeping monetary policy ultra-easy. The only uncertainty is whether Obama has what it takes to convince Congress to reach a deal on the fiscal cliff. We know that Obama wants a “grand bargain” that includes entitlement and tax reforms, spending cuts and tax increases on the wealthiest Americans but if a deal doesn’t involve higher taxes for the wealthy, the fight could get messy. For more on the election, read our piece on the 4 Ways that the U.S. Election could Impact the Dollar.

EUR: Weaker Data Will Prevent Any Optimism from ECB

Movements in the EUR/USD today have been restricted by the offsetting dynamics of renewed optimism for a Spanish bailout and weaker European data. The Spanish government is playing mind games with the market because they are simultaneously denying the need for a bailout and open to the idea of one. According to Spanish Prime Minister Rajoy, he “doesn’t rule out a possible bailout request” because “high yields would lead to bailout request.” The question for him is “how much yields would drop with a bailout.” Knowing the potential terms of a bailout is the main reason why Spanish officials are floating the idea out because they want to know what type of deal they can get regardless of whether they choose to accept it. In terms of economic data, inflationary pressures in the Eurozone slowed, service sector activity was revised down for the month of October and German factory orders plunged the most in a year. This decline also points to the possibility of weaker German industrial production, which is scheduled for release tomorrow. Economists are looking for a decline in retail sales but with German and French consumer spending increasing, there is room for an upside surprise. Overall, mostly weaker Eurozone data will keep the ECB from sounding overly optimistic on Thursday. If anything, we expect more words of caution from a central bank who is ready to go with operation OMT as soon as a country asks for help.

GBP: Wave of Weaker Data

Despite a wave of weaker economic data, the British pound held steady against the U.S. dollar and euro. UK industrial production dropped 1.7% in the month of September against expectations for a more modest 0.6% decline. Manufacturing production also missed expectations, rising a mere 0.1% compared to a forecast for 0.4% growth. House prices declined for the fourth straight month in October by 0.7%. The National Institute of Economics and Social Research also lowered its growth forecast for the British economy last week and UK consumer confidence fell to a six-month low in October. This overwhelmingly consistent deterioration in U.K. data shows that last month’s improvements are fading quickly. While we don’t expect the Bank of England to ease this week, there’s a good chance that policymakers are once again considering the possibility of more asset purchases. Two weeks ago, this was not the cause but after back to back disappointments in economic data, it will be hard to not wonder whether the trend of growth is reversing once again.

CAD: Shrugs Off Weaker IVEY

Higher oil and gas prices drove the Canadian, Australian and New Zealand dollars higher despite mixed economic data. Manufacturing activity in Canada slowed in the month of October, which is not surprising following the recent disappointment in Canadian employment data. The IVEY PMI index dropped for the third month in a row from 60.4 to 58.3, reinforcing our belief that the Bank of Canada will drop their call to raise interest rates at the next monetary policy meeting. The Reserve Bank of Australia on the other hand left rates unchanged at 3.25%, helping to lift the AUD and NZD. While the market was surprised by the decision, our readers shouldn’t be because we laid out a strong case for the RBA to keep rates steady. As we expected, the RBA was a bit more optimistic on China, saying that “the outlook for the global economy was more positive with growth in China stabilizing.” They also felt inflation was slightly higher than anticipated which means the strength of the AUD and weakness in global demand has not been enough to mitigate price pressures. New Zealand employment numbers are due for release tomorrow and an improvement is expected with the unemployment rate expected to ease off its 2 year high.

JPY – More talk of Easier Monetary Policy

The Japanese Yen weakened against all major currencies today and Japanese stocks also fell as they wait for the US presidential election. Japanese leading index declined more than expected in September to 91.7. Speculation that Greece will fail to come to a loan agreement next week caused stocks to plunge. Europe’s debt and Greece’s bailout is causing worry to the market. A senior Bank of Japan official said that the BOJ’s implementation of a new unlimited lending program may further weaken the yen. The bank introduced a low-interest loan program last week in attempt to boost demand for credit and drive growth. The program offers loans at the central bank’s overnight call rate of 0.1%. Executive Director Hideo Hayakawa said that a weaker yen “isn’t our main objective but it’s a common understanding that an accommodative policy eventually leads to the depreciation of one’s own currency.” According to several BOJ board members Japan may have entered a recessionary phase according to the BOJ’s October 4-5 meeting’s minutes released last week. Hayakawa said that the BOJ isn’t “100% confident yet” on the success of this newly implemented program and is aware of the possibility that it will cut banks’ profits by lowering lending rates. There is no data due for release tomorrow in Japan.

Kathy Lien
Managing Director

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