Risk FX Rallies as Obama Wins Decisively

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Risk currencies rose in the wake of Barack Obama’s win for the second term of US presidency as investors were buoyed by the prospect of continued accommodative monetary policy of his administration. After a hard fought campaign with Mitt Romney that suggested a very close outcome, Mr. Obama scored a decisive victory in the Electoral College winning 303 votes to Mr, Romney’s 206 while also beating Mr. Romney in the popular vote by 50% vs. 48%. The win makes Mr. Obama only the second Democrat in recent history to win two consecutive terms to the Oval office.

As the news of Mr. Obama’s victory became known US yields dropped markedly. The benchmark 10 year yield fell to 1.6876% in midday Asia trade from 1.7489%,in North American close on Tuesday. That led to sharp rally in high beta FX with EUR/USD rising to 1.2870 and Aussie breaking above the 1.0450 level. US yields have since firmed, rebounding to 1.7138% in early European trade putting a cap on the rally for now.

As we noted yesterday, the sharpest contrast between the two candidates with respect to the currency market lay in their different approaches to monetary policy. Mr. Romney may no secret about his distaste for the current accommodative policy of the US Fed and stated that he would not renominate Ben Bernanke for a third term as Fed President. Mr, Romney’s win would have clearly produced a more hawkish US monetary policy and was viewed as a negative development for risk assets.

Mr. Obama’s win therefore was taken with a sigh of relief by global financial markets as traders anticipated that the accommodative monetary stance and mildly stimulative fiscal policy of his administration would continue. Mr, Obama however faces a host of challenges almost immediately as he assumes his second term as he must now deal with the looming prospect of the fiscal cliff and the difficult task of negotiating with a split Congress where the Republicans maintain a sizable majority in the House of Representatives of 228 to 180.

That’s why after the initial euphoria of the Obama win, the rally in risk FX has stalled at key levels. The EUR/USD remains just barely above its 200 day moving average of 1.2828 and will need to retake the key 1.2900 level in order to relieve some selling pressure as it continues to trade in a downtrend. With only a smattering of second tier economic data in European session, traders may wait until the North American open to gauge the full reaction to the Obama victory.

Boris Schlossberg
Managing Director

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