Eur Move Depends on Greek Vote Not US Election

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Market Drivers for November 7, 2012
Obama wins 2nd term spurs rally in risk
Greek vote on tap later today
Nikkei -0.03% Europe 0.79%
Oil $88.30/bbl
Gold $1730/oz.

Europe and Asia:
AUD Construction Index 35.8 vs. 30.9
EUR Germany Retail Sales -0.2% vs. 0.0%
EUR GE Industrial Production n/a

North America:
no economic events
Greek vote

Risk FX remained higher but was off its best levels in quiet European trade today after a strong rally spurred by President Obama’s victory to gain a 2nd term. 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 made 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.

With no economic data on the calendar today, the focus in FX will shift across the Atlantic where the Greek Parliament votes on a key austerity measure that could determine whether Greece will obtain the vital bailout funds from EU in the middle of November. The Greek populace is vehemently opposed to the change in labor law provisions, but with the country on the verge of insolvency, most experts believe that the Greek government will pass the measure by a narrow majority win. Still the Greek electorate remains vehemently opposed to further financial sacrifices and the prospect of failed vote is not outside the realm of possibility. Such a development would likely jar the EUR/USD reviving speculation of a “Grexit”. Although such a move no longer frightens the market the way it once did, it nevertheless presents a series of unknowns that is sure to raise risk aversion flows in the EUR/USD. That ‘s why whether the pair falls to 1.2700 or rises to 1.2900 depends less on the results of the US election and more on the outcome of the Greek vote.

Boris Schlossberg
Managing Director

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