Voting Begins In The US
Polling has opened on the Eastern Seaboard and we expect market activity to remain limited through the rest of the day as results filter in, from 19:00 ET, and if all the state votes are decisive, a winner may be declared around 23:00 ET. The only major market driver during the European session was further concerns on the situation in Greece. With a key vote on austerity measures due tomorrow, the outcome is considered by some to be in the balance, but enough to concern the Eurogroup such that a special meeting originally scheduled on the 8th to discuss the situation has now been postponed. Another event risk is the European Commission’s budget forecasts due tomorrow, which could again refocus the issue on Spain. Overall though, risk managed to stay on a steady footing. During the Asia session, the RBA kept rates unchanged at 3.25% overnight, surprising a majority of Bloomberg-surveyed economists who had been looking for a 25 bp cut. The rates market was evenly divided going in to the announcement, so the decision was always likely to inject some life into AUDUSD whatever the outcome. Ultimately, AUDUSD climbed 70 pips and still looks firm at the time of writing. Elsewhere, activity was predictably subdued ahead of the US Presidential Election, which remains too close to call. From an FX perspective, an Obama victory could trigger an initial pullback in USD, which appears to have garnered some support from hopes of a more growth-supportive backdrop under a Romney win – not to mention the sense that that the market may start to question the ‘credibility’ of the Fed’s forward rate guidance beyond January 2014, when Bernanke’s term expires. The more pressing post-election issue will be whether the two parties can forge quick agreements on the ‘fiscal cliff’ and debt ceiling. This effort could be compromised in the event (i) Romney wins the popular vote, but falls short in the Electoral College; or (ii) neither candidate attains the required 270 electoral votes to be declared President, raising the unusual spectre of a President chosen by the House and a Vice President by the Senate. Yes, a Romney-Biden result is not totally out of the question. The threat of partisan politics and policy gridlock in Washington could work against USD in the first instance, but this may turn into a broader risk-negative factor that would ultimately benefit such ‘liability currencies’ like USD (and JPY) to the extent we get to the edge of the cliff without a deal and US recession fears take hold. Overnight EURUSD traded 1.2764-1.2813 and USDJPY 79.97-80.29.
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UBS Investment Bank