– The US election outcome…Obama is victorious, the House is Republican, the Senate stays Democrat
The election is basically over and it we will almost certainly get status quo: President Obama is re-elected for another four years, and the Democrats maintain a similar margin of leadership in the Senate while Republicans retain a similar margin of dominance in the House. This outcome has the following implications:
1) This modestly strengthens the negotiating position of the Democrats with regard to the fiscal cliff. Republicans will have more difficulty claiming strong voter support for their harder line positions and we will end up with less fiscal tightening in the near term. This is not to say the negotiations over the next few weeks will not be contentious, they will. Indeed it lived up to expectations for being an incredibly close election and neither party can claim a mandate. This means both sides will want concessions to reach an agreement to avoid the cliff. But in the end President Obama is a second term President likely more focused on legacy than re-election. And this election reflects an electorate begging for compromise. We think we will end up with a broader and more benign compromise, potentially including a lifting of the debt ceiling before year end.
2) Continuity in monetary policy–we think Vice Chair Yellen is the likely front runner to replace Chairman Bernanke which would ensure a nearly seamless transition of the current aggressive stance of monetary policy.
3) Less Change–while some controversial policies such as Obamacare will be put into place as scheduled, we know more about the contours of the road ahead versus what we could expect with a change in administration. This removal of uncertainty could be positive for business and household decision-making and the near term growth outlook.
4) The longer term fiscal issues of the US are still not likely to be dealt with in the near term. The good news is less near term fiscal tightening and rancorous negotiations allowing the recovery to continue to broaden and strengthen. The bad news is a steadily rising debt to GDP ratio. An eventual downgrade of the US is likely.
We would like to thank the US economists for their contribution.
– For the USD this means…we stick with our bearish view
Our bearish USD view through end 2012 and for all of 2013 has been premised on the assumption that US President Barack Obama is re-elected, the Republicans retain a majority in the House and no party has a 60-vote majority in the Senate. Continuity at the Fed means our US economists’ forecast of balance sheet expansion of between $1.2 and $1.7 trillion is on track. Such aggressive QE3 will likely weaken the USD through to at least end 2013 consistent with our forecasts (see chart). We maintain short USD trade recommendations against GBP, JPY and NZD. The election results have already produced a risk positive reaction in Asia, consistent with the status quo combination of minimal fiscal tightening (via the fiscal cliff) and a very dovish Fed.
– A Draghi OMT reiteration at the ECB meeting would help EURUSD
The uncertainty continues as to when Spain requests formal assistance and if this coincides with requests by Greece, Cyprus and Slovenia at Eurogroup (November 12) meeting. Our CDS measure has continued to flag a neutral to positive outlook for EUR crosses, but our FX positioning analysis suggests short EUR positions are beginning to increase, though from neutral levels. We believe that the EUR has been holding so well on improving capital flows outlook, but this has been driven by the ECB promise to backstop the bond markets via the OMT. Hence we would require Draghi to simply reiterate this message at this week’s press conference (Thursday) to keep EURUSD supported.
BNP Paribas