GO Markets FX Analysis – Markets rally in the face of political uncertainty – 7th November 2012

US equities record solid gains overnight despite the threat of an extended period of political uncertainty. At this juncture, political pundits suggest the result of the presidential election is too close to call, and an unconvincing result will open the door for potential lawsuits and vote recounts before a decisive victor is named. Should the latter occur, one expects an extended period of negativity across key sentiment barometer with the greenback a prime beneficiary. While the short odds may be well-and-truly in favour of an Obama victory, it’s clear either a Romney or Obama win will see markets immediately turn respective policy to combat the impending fiscal cliff, referring the expiry of the bush-era tax cuts and automatic spending cuts to kick in next year. Even a decisive win may result in the same political brinkmanship investors have become accustomed to surrounding major policy decisions, depending on where the balance of power rests in congress. Also in focus is Romney’s apparent will to remove Fed Chairman Ben Bernanke from the chair when his term concludes in 2014. In his six year tenure, Bernanke has displayed a willingness to embark on policy measures conducive to US dollar weakness – à la, quantitative easing. In turn the prospect of a Republican appointed Fed Chairman may set the stage for a period of greenback strength.

Spain’s Rajoy on bailout: ‘thanks, but no thanks’

Giving his clearest indication to date, Spanish Prime Minister Mariano Rajoy has played down speculation Spain will require near-term bailout. In an interview with a Spanish radio station, Rajoy once again displayed reluctance to formally seek financial aid in exchange for ECB bond purchases, given the questions over the size and scale of the Mario Draghi’s proposed scheme. In reference to the yield differential against German bunds, Rajoy noted a bailout will be contingent on how much the risk premium will come down, implying the terms need to be more attractive before considering a bailout. “If it only serves for the premium to stay at 400 and not come down to 200 then obviously that’s not the same thing,” Rajoy said.  He did however concede “if we see that during a long period Spain is financing itself at very high prices then we would have to ask for it.”

Euro returns from 2-month lows

All things considered, the Euro’s had a respectable run against the greenback in the last couple of months and while there’s likely to be a few more positive events act as a cushion for the Euro, we see gains limited by a few negatives themes floating about. One of which is Spain’s apparent reluctance to request a bailout. The Euro’s rallied off the back of the prospects of a Spanish bailout in recent times and it appears patience is wearing thin. This implies if Spain doesn’t go quietly, we may see the familiar scenario of investors holding debt markets to ransom. We’ve already see a break to the downside of $US1.28 which signals bearish momentum, and at the time of writing we’re seeing price action resting a fraction below the 200MA at 1.2827. Also in the frame is Greece’s plight to pass through parliament critical budget reforms agreed with the troika need to secure their next bailout instalment. Although there’s a sense Samara’s fragile majority will hold; there remains a strong element of doubt over the country’s ability to regain economic composure in the face of harsh austerity. This may suggest a rally on the back of any closure to the Greek reforms may be short lived, as markets refocus their gaze on broader challenges in Greece and the aforementioned Spain.

A$ bulls appeased as RBA flags inflation; focus shifts to local jobs data

The Aussie dollar recorded solid gains after the RBA held interest rates steady at 3.25 percent. Although the local unit began a steep ascent in the ensuing period, a notable paring back of rate cut expectations in the lead up, took some of the steam out of the rally. The statement reiterated the banks view resource investment is likely to peaking in 2014, and at lower levels than previously expected. Notably, the statement reversed October’s delicate downgrade of China, noting “recent data from China suggest growth there has stabilised.” While acknowledging the recent stronger than anticipated inflation pulse, the bank expects consumer prices to remain within the confines of the medium-term target, despite the introduction of the carbon tax. Nevertheless, it also noted the high Australian dollar’s role in dampening inflation may be waning, and while softer labour market may act to keep inflation pressures contained, improvements in productivity will also be required to keep price pressures in check. While there appears to be no inflation alarm bells sounding, the statement justifies the decision citing more positive global conditions and slightly higher than expected inflation data. This demonstrates the board are a little less relaxed on inflation front than displayed in recent correspondence. The use of the language rates are appropriate “for the time being,” is perhaps another way of saying ‘we’re ready to cut rates, but we’ll see how things pan out of the next month’. This puts emphasis top-tier data points in the month ahead, with Thursday’s employment data the first critical test. The only release on today’s docket is the usually low ranking RBA FX reserves data. Nevertheless, we expect this may received more attention given data showing the RBA are accumulating FX reserves in what appears to be a form of passive intervention. At the time of writing the Australian dollar is buying 104.45 US cents.





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