Daily FX Market Roundup 11-05-12

4 Ways US Election Could Impact the Dollar
EUR: Hits 1 Month Low
GBP: Weaker Service Activity Follows Weaker Manufacturing
AUD: Will the RBA Ease Again?
CAD: Big Decline in Building Permits
NZD: Minor uptick in Average Hourly Earnings
JPY – Back in Recession?

4 Ways US Election Could Impact the Dollar

The U.S. Presidential Election is finally here and it is one of the tightest races in recent memory. U.S. voters will go to the polls on Tuesday and if we are lucky, by tomorrow evening we will know whether President Obama has been elected for a second term or if Mitt Romney will become the 45th President of the United States. On Election Day in 2008, risk appetite was strong with gains seen in the EUR/USD, USD/JPY and stocks. However on the day that followed, the EUR/USD flat lined while USD/JPY and the S&P 500 fell sharply lower. The price action of currencies and equities on the day after the election did not reflect the people’s disappointment with the results – quite the contrary, America just made history by voting in its first ever African American President. Instead the weakness in USD/JPY and the S&P 500, which began the day after the election and continued for 2 weeks to follow reflected the market’s concern about the impact of Democratic policies. Republicans are generally considered more business friendly than Democrats and while there have been a number of reports that claim Democrats are more positive than Republicans for stocks, investors will still react impulsively.

Here are 4 Ways that the U.S. Election could Impact the Dollar:

1. General Economic Policies – We already touched on general economic policies. Democrats tend to be less business friendly and President Obama specifically aims to close the budget gap by increasing taxes on multinational corporations that ship jobs overseas, the oil and gas industry, high income individuals, capital gains and dividends. Romney on the other hand is calling for broad based tax cuts. Which plan will effectively turn the economy and deficit around is a completely different discussion but there mere prospect of Obama’s policies hurting business could be enough to drive a reaction similar to 2008 where stocks and USD/JPY fell.

2. Handling of the Fiscal Cliff – While the winner’s economic policies will have a significant impact on the handling of the fiscal cliff, the issue that we want to address is which winner will be more effective in getting Congress to agree on a solution. Since the Republicans have been blocking President Obama’s plans to deal with the fiscal cliff, Mitt Romney may have an easier time breaking the political gridlock, which would be positive for the dollar.

3. Federal Reserve – If President Obama is reelected, he will most likely keep Ben Bernanke as the head of the Federal Reserve. Romney on the other hand has pledged to replace Ben Bernanke as Fed Chairman, which could cause significant volatility in the financial markets. The potential uncertainty would be significantly negative for the financial markets and deal a major blow to currencies and equities. Also Romney’s choice of replacement would most likely be someone who is less dovish than Bernanke, which could be positive for the dollar.

4. China Policy – President Obama’s administration has taken a subtler, behind closed doors approach to getting China to appreciate its currency. Mitt Romney has made it known that he would brand China a currency manipulator shortly after taking office. Doing so, could set off a trade war that may prompt China to threaten to dump its massive holding of U.S. dollars and U.S. Treasuries, which could pose a major risk to the U.S. recovery.

Overall, President Obama’s policies are more negative for the dollar than Mitt Romney’s even if they prove to be more effective in bolstering the U.S. economy in the long term. InTrade gives President Obama a 67% chance of winning the election but his victory is far from certain.

EUR: Hits 1 Month Low

The euro fell to its lowest level against the U.S. dollar in more than a month. There was no major Eurozone economic data on the calendar but broad based weakness in European equities and rise in Spanish and Portuguese bond yields weighed on the EUR/USD and triggered stop loss selling below 1.2820. Spain continues to brush off the need for a bailout. Economy Minister De Guinidos said a bailout was not discussed at the G20 meeting and no country is pressuring them to accept a bailout, they will seek one when the time is right. He even said they are comfortable with the current debt-financing situation and can “guarantee” a current account surplus next year. Their attempt to reassure the market fell on deaf ears as euro continued to weaken against the U.S. dollar. Final Eurozone service sector PMI numbers are due for release tomorrow along with producer prices and German factory orders. The sharp decline in German and French producer prices points to significantly softer inflationary pressures in September.

AUD: Will the RBA Ease Again?

Of the 3 commodity currencies, the biggest mover was the Australian dollar, which is not saying much when the AUD is up only a quarter of a percent against the U.S. dollar today. While there have been consistent improvements in Australian economic data, the rally in the AUD/USD has been capped by concern that the Reserve Bank could ease again this evening. The RBA cut interest rates by 25bp in October and a very small majority of economists are looking for another rate cut in November. It will be a very close call because even though there have been improvements in data, manufacturing and service sector activity are still in contracting. We believe the RBA will stand down and leaves rates unchanged at 3.25% because the minutes from the last central bank meeting wasn’t overly dovish. The RBA expressed specific concerns about the Eurozone and China and while the risks in Europe remain unchanged, the official data from China shows manufacturing and service sector activity expanding once again in October. Last night, we saw further evidence of improvements in Australia. The Australian economy is very sensitive to the changes in monetary policy and the last rate cut from the RBA has already lent to support to the housing market, manufacturing and service sectors. According to AiG, service sector activity contracted at a slower pace in October with the PMI index rising to 42.8 from 41.9. Retail sales also rose a more than expected 0.5% while the trade deficit narrowed to -1456 million from -1876 million in the month of October. Although HSBC reported a slower expansion in China’s service sector, the official government data reported faster growth and both releases see service sector activity expanding, which is good for China and Australia. The Canadian economy on the other hand is not doing nearly as well with permits dropping 13% in September, the steepest decline since April 2011. Wage growth in New Zealand on the other hand increased in the third quarter. Aside from the RBA rate decision, Canada will also release its IVEY PMI report.

GBP: Weaker Service Activity Follows Weaker Manufacturing

The British pound has been unable to rally against the U.S. dollar for the last 3 trading days. While September was a good month for the U.K. economy, we are beginning see the momentum enjoyed during the summer months fade. According to the latest economic reports, service sector activity expanded at a much slower pace in October compared to September. In fact with the PMI index dropping to 50.6 from 52.2, the sector is barely expanding. Markit Economics, the agency that releases the report said that activity rose at its weakest pace in 22 months due to slower growth in new business and stronger competitive pressures. This follows a decline in manufacturing activity reported last week. This is certainly not good news for the Bank of England but a contraction in service sector activity may need to be seen before they consider increasing asset purchases again. BRC retail sales are due for release tomorrow along with industrial production, house prices and GDP estimate. Low interest rates and the government’s Funding for Lending Scheme should continue to support housing activity but industrial production may decline at a faster pace in the month of October.

JPY – Back in Recession?

The Japanese Yen traded higher against all of the major currencies despite the marginal uptick in U.S. equities. No data was released from Japan last night but concern about the potential outcome of the U.S. elections led to risk aversion in the FX market. The outlook for Japan remains troubled with the Bank of Japan admitting this weekend that the country may have entered a “recessionary phase.” Japanese GDP numbers are not due for release until next week and in the second quarter, GDP increased which means the BoJ either expects Q2 growth to be revised downwards or expects negative growth in Q3 and Q4. The market is looking for a 3.3% annualized contraction in GDP in the third quarter but Nomura, who has the most extreme forecasts of the banks surveyed by Bloomberg expect Japan’s economy to contract by 5.1%. According to the G20, the prospect of sharp spending cuts in Japan in the coming year adds to the risks for the economy. With such difficult challenges ahead, there’s no wonder that the government “strongly expects” powerful easing until deflation is overcome. The coincident and leading indices are scheduled for release this evening.