Americans are headed for the polls today to cast their vote for the next President of the United States. If we are lucky we will know the winner by the end of the day because the worse case scenario for the financial markets would be a stalemate that prolongs the process and involves the counting of thousands of absentee or provisional ballots. Investors hate uncertainty and anything short of a clear victory will probably lead to weakness for currencies and equities. U.S. equities are trading higher this morning and while the dollar is at an 8 week high against the euro, it is not performing as well against other currencies. The U.S. election is very important but today is one of those days where country specific factors are driving the movements in FX. Commodity currencies are up sharply against the U.S. dollar but there has been little activity in the Japanese Yen and European currencies.

No major U.S. economic reports are scheduled for release today but currencies are trading the same way they did on Election Day in 2008 when the EUR/USD, USD/JPY and stocks rose modestly. Ten days later, all 3 traded lower before bottoming out which suggests that we can expect a similar reaction from an Obama win. The only meaningful data out of North America was Canada’s IVEY PMI report. Manufacturing activity in Canada slowed in the month of October which is not surprising considering the recent weakness 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 rates at the next monetary policy meeting.

Meanwhile movements in the EUR/USD 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. Slower Eurozone growth will keep the ECB from making any positive comments on Thursday. Gains in the British pound were capped by weaker industrial production while the Australian and New Zealand dollars benefitted significantly from the Reserve Bank of Australia’s decision to leave rates unchanged last night.

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