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The Election's Implications For FX Markets

Tyler Durden's picture




 

Over the last few weeks we have looked at where the two candidates stand, the implications of a Romney win on the economy, how investors are positioning in equity and bond portfolios for each candidate's potential victory, what gold will do, what stocks will do, and the fact that either way; the easy-money days are over. The last market to look at is the largest - the foreign exchange market - and Citi's Steve Englander provides a succinct explanation of how the various asset-class shifts post-election will impact flows in the FX market. Most specifically, how sensitive various safe-haven and risk-sensitive FX crosses will be to House composition. He also notes the potential for knee-jerk reactions as timing issues across various state poll closings offers exit poll information - especially as a Romney win is very much not priced in.

 

Via Citi:

Market implications of election outcomes

Today’s sell-off is not about the election. It is primarily driven by concerns on the Greek vote, Spanish collateral and to a lesser degree, concern that the ECB will cut rates this Thursday. In the US the polls have coalesced on an Obama victory, although there is still optimism on the Republican side based on the diminished Obama buzz in 2012 versus 2008, the size of Romney-Ryan clouds in swing states, and the opacity of the adjustment that pollsters make in gauging likely participation in the election (reminiscent of the BLS’ birth-death adjustment for payrolls, where the imputed number often dominates the actual count). So by now, you have to see an Obama win having modest impact on asset markets and a Romney win being the big surprise. So what to look for:

  1. If Obama wins, the initial reaction might still be some modest buying of fixed income, on the view that the Fed will be encouraged to proceed on its QE path and there will be more continuity at the end of Bernanke’s term. Equities may be a tug of war between the easier Fed view and the less-business-friendly/end-of-capital-gains-tax-reduction Obama view. On FX we could see some backing off from the short JPY trade, although that trade has more to do with Japan than the US over the medium term, and maybe some re-buying of CAD. Overall probably negative for the USD, although the immediate effect should not be large. In the first instance the main winner is CAD; JPY also in play given positioning and rate sensitivity. Other winners AUD, NZD, NOK as QE-continuity trades. SEK may lag given its equity link.
  2. After the initial Obama-win rally, the fiscal cliff comes into focus (this may take a few days to a few weeks). We would pay particular attention to the composition of the House. Going into the election, the Republicans have 240 seats vs 190 for the Democrats. The expectation at the beginning of the campaign was that the Democrats would pick up a couple of seats, but that Republicans would retain a significant majority. Were the Republicans to hold or improve their majority, they may be emboldened to take a harder line in fiscal cliff negotiations -- unambiguously positive for fixed income, negative for risk-correlated assets and paradoxically positive for the USD. However, the USD surge would reflect safe haven flows in Treasuries, rather than any expectation that US assets would outperform on a cyclical or structural basis. JPY the big winner on downward US rate move. CAD, AUD, SEK, NOK and other risk correlated currencies are most vulnerable on the downside.
  3. If the election is uncertain – which is possible if voting is very close in key states – it would probably be viewed as raising the odds of a Romney win, or at least raising uncertainty. On that basis, we would lean to initial concern that we would see austerity both on the fiscal and monetary side – commendable from an ideological viewpoint, but unlikely to inspire confidence in asset markets. So we would lean to partial risk-off. Note that results may be clear, even if they are not final so the informal period of uncertainty may be less than the formal period. Romney partial or full win – immediate reaction is fixed income sell-off and equity sell-off so JPY is vulnerable as its main correlation is via rate differentials and CAD is particularly vulnerable on fears of US fiscal tightening and economic slowdown. Other risk-correlated currencies sell-off as well.
  4. Romney win is really not priced in. In the first instance we think the reaction will be concern that he will tighten on the macro side prematurely and lead to a broad sell-off in equities and fixed income, and buying of USD, but we think he will quickly back-off from the Ultra-view of where policy is headed. So if Romney backs off from immediate macro tightening and fiscal cliff is put off, equities could come back, as well as risk-appetite in coming weeks.

Timing issues:

Exit polls will be carried on all day long, with a consortium of media sources combining efforts. Most news sources have agreed to quarantine all details of exit polls till until polls close, but some details on the demographic composition of voters may be released at 5-6PM EST, so some investors may draw inferences from these data. Exit polls, especially partial ones have a mixed reputation, because the demographics of early AM voters differ from those of noon and PM voters.

  • Virginia and Florida polls close at 7PM EST so those might be the first battleground states that report, and we may quickly know if there is a wave one way or another in these states.
  • Ohio closes its polls at 7:30PM EST and will quickly publish absentee ballots. If those ballots show a big swing from 2008, it may signal increased Romney odds. Ohio will then publish results from big counties every 15 minutes, so if the result is clear, we should know by about 9-930pm who has won Ohio. If it is Florida-2000 close, the count could drag out for weeks.
  • Other states that close at 7:30PM – North Carolina and West Virginia.
  • Pennsylvania and Michigan polls close at 8PM, so if there is an upset, we will likely know it from other states first.

Link to poll closing times --

 

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Mon, 11/05/2012 - 14:45 | 2949292 DoChenRollingBearing
DoChenRollingBearing's picture

Obama wins: Gold bitchez! (And quick!)

Romney wins: Gold bitchez! (Although you have a little more time)

 

EDIT:

Obama wins: Guns & ammo, quick!

Mon, 11/05/2012 - 15:15 | 2949370 mick68
mick68's picture

Rasmussen was the most accurate polling done in 2008 and right now they have Romney with an edge. Check out their polling map and swing states, if they're right, Romney probably has this election.

Mon, 11/05/2012 - 14:44 | 2949294 Orly
Orly's picture

It seems the action in USDJPY is starting to price in a Romney victory, or at least a shift from risk-on to risk-off currency pair.  After the election, you should probably expect the USDJPY to head much higher.

:D

Mon, 11/05/2012 - 16:56 | 2949744 falak pema
falak pema's picture

eurusd : 1.279

Wed, 11/07/2012 - 18:24 | 2958378 Yen Cross
Yen Cross's picture

Orly, quit with the reruns. If , I mean if!  I would possibly explore gbp/jpy longs, as that eur/gbp trade is looking interesting.

 the usd/gbp(cable) trade looks a little over sold. The Asian markets look a bit over bought. I traded gbp/aud pretty well earlier.

 Go look at the basics.  The usd/jpy trade isn't worth it. The crosses are even worse. Stay flat for now.

Mon, 11/05/2012 - 14:47 | 2949299 Bam_Man
Bam_Man's picture

FX "markets"? What FX "markets"?

All currencies are now actively Central Bank-managed, and have been for years. Anybody attempting to trade this so-called "market" without the benefit of insider information will promptly get their face ripped off.

Mon, 11/05/2012 - 14:48 | 2949300 Bam_Man
Bam_Man's picture

.

Mon, 11/05/2012 - 15:16 | 2949331 Dr. Engali
Dr. Engali's picture

Okay that seals it. Obama is in for another four years. Can we start talking about the 2014 elections now or should we give it a couple of days?

Pretty map though, my kindergarten daughter colored one similar a few days ago. Shouldn't there be seven more states there? Obummer said so.

Mon, 11/05/2012 - 15:23 | 2949402 Schmuck Raker
Schmuck Raker's picture

None of this will matter when the Yuan becomes the World Reserve Currency next year.

/sarc

Mon, 11/05/2012 - 15:41 | 2949446 monopoly
monopoly's picture

Could not pass this up for you all. From Jim Sinclair:

Mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose wisely. 
–Woody Allen

Mon, 11/05/2012 - 15:44 | 2949460 monopoly
monopoly's picture

And what time does Amerika close?

Mon, 11/05/2012 - 16:23 | 2949600 blunderdog
blunderdog's picture

How exactly is Romney going to "tighten" on the macro side?

Firing Big Bird isn't going to save *that* much money.  What else can he DO?  Stop mailing Social Security checks?  Stop paying Medicare bills? 

End the WARS?!?

Sequestration is going to be in effect before the guy takes office, isn't it?

Mon, 11/05/2012 - 17:27 | 2949843 JimBowie1958
JimBowie1958's picture

There is plenty he can do starting with turning off the USD spicket by ending QE.

He can also restore faith in the economy and currency across the globe by anouncing a study of some sort of commodity standard for the USD and promptly start cutting spending and growing the economy.

And I can stop deluding myself, lol.

Mon, 11/05/2012 - 19:17 | 2950174 blunderdog
blunderdog's picture

Well, he doesn't have the authority to end QE, but he could fire Bernanke.  Not that that'll do any good--the next Fedhead will be in the same position Bernanke is.  The Fed is technically independent--they don't take order from the Prez.

A study of a commodity-backing would be a nice bit of theater, I'll give you that.

Mon, 11/05/2012 - 17:18 | 2949802 Sunshine n Lollipops
Sunshine n Lollipops's picture

Which one gets me a free pony?

Mon, 11/05/2012 - 17:51 | 2949915 stormsailor
stormsailor's picture

isn't one unicorn up your ass enough?

Mon, 11/05/2012 - 19:00 | 2950115 Clowns on Acid
Clowns on Acid's picture

One has to factor in all the $$ that Obama has / will spend in transforming the US from approaching the point of no return, to ghitting the point of no return.

All Media revenue models are based uopn the advertisng / consumption model of "buying yourself self esteem" by feeling good. This model will collapse with any responsible Federal fiscal policy.

I believe that is the underlying reason that all MSM is puling out all credibility stops to re-elect their meal ticket. Even the famed Ireland bookmakers, Paddy Power is paying off bets on Obama early ! This does not make any sense from a betting perspective, but does for the biased media perspective.

It's going to be a see saw afair with lots of "recounts", efectively overloading the system and providing cover for sleight of hand recounting tricks. We have seen them before at many State level elections. 

Vol high, credibility of an Obama win...very low.

Mon, 11/05/2012 - 19:47 | 2950266 VonManstein
VonManstein's picture

if "the market" has priced in an obama win why is the DXY where it is and gold where its is? sorry, its not a clear cut as that.

Wed, 11/07/2012 - 18:19 | 2958330 Yen Cross
Yen Cross's picture

The Election's Implications For FX Markets | ZeroHedge

   Because, no-one knew what they were talking about. There were equally compelling reasons to buy or sell for both candidates.

 As the dust settles, every one realizes the $6 billion party is over. Higher taxes and more regulation. Dysfunctional energy policy.

  Healthcare armageddon, deeper loss of privacy, ect..

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