A burst of energy from risk currencies quickly lost steam overnight, as markets refocused their gaze to the impending fiscal cliff in the wake of Obama’s re-election. Investors had been bracing for an elongated period of politically uncertainty given the prospect of an inconclusive result, but any solace felt on the decisive win proved to be short-lived. Obama’s Democrats may have boosted their numbers in the senate, but Romney’s Republican Party retained their majority in the House of Representatives, paving the way for more of the same and political brinkmanship markets have become accustomed to in last year’s debt ceiling negations. Despite the broad based sell-off overnight, it’s clear Obama’s victory is also a win for a Bernanke led Federal Reserve, given Romney’s position on quantitative easing and apparent will to remove the pro-stimulus Bernanke from the Chair at the end of his term. An immediate slide from the greenback suggests this was a prominent concern across markets, which stand to benefit from the Fed’s latest stimulus offensive, by pumping unsterilized cash into the economy to the tune of $US40 billion per month. Gold and silver enjoyed a meaningful rally in the period to follow, however Obama’s victory parade quickly disbanded with the US dollar’s safe haven appeal kicking into gear as equities slid.
Flagship Germany hit by peripheral weakness
Compounding the broad risk-off environment was concerns across the Atlantic driven by the latest growth estimates by the European Commission, which forecast GDP growth of just 0.1 percent in 2013. Considered to be the bright spot among broad peripheral weakness, concerns Germany’s economy may be dragged under by persistent peripheral weakness weighed on sentiment. These concerns were echoed by ECB President Mario Draghi overnight who stated: “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy.” The European Commission expects German GDP to record 0.8 percent growth this year, down considerably from 3.0 percent growth in 2011. Estimates show 2013 will also be a year of meagre growth from Germany with GDP to growth just 0.8 percent according to their latest estimates. Naturally, the euro responded negatively to the forecasts and Draghi comments, while a steep drop from US equities confirm the downside, with bearish momentum carrying the Euro to lows of $US1.2735. The focus from here will be on the much anticipated European Central Bank decision this evening (local time).
Jobs to define RBA’s next move
Locally, the emphasis will be on employment numbers which are expected to show the Australian economy created a net 500 jobs in October, with the official unemployment rate edging up from 5.4 to 5.5 percent. True to form, this will be a top-tier directive for the Aussie dollar given the implications to local interest rates. Earlier this week we had a less-than-encouraging prelude to today’s jobs numbers, with ANZ jobs ads sliding of 4.6 percent in October following a 3.9 percent drop in September. The finer points of the release shows ads for new employment opportunities were down Australia wide, including in Western Australia, which is heavily weighted towards mining-related jobs. In the wake of last week’s RBA hold decision, markets have been quick to respond with interbank futures implying a 60 percent chance of a rate cut in December. We consider today’s jobs numbers a critical influence on markets expectancy and will define the appeal of the Australian dollar during domestic trade and broader rate expectations ahead of next month’s meeting. The local unit peaked at 104.82 US cents in the ensuing period of Obama’s victory, but correlative value to US equity markets saw the local unit slip lower, before support at 104 US cents kicked in. We anticipate a deviation to the downside of estimates on today’s jobs numbers to force move into the 103 handle with support between 103.6/7 to slow the pace of selling. Outperforming jobs data should see a break though 104.2 US cents, but ultimately we anticipated a re-test of overnight highs to be unlikely unless a significant deviation to the upside of estimates is seen. At the time of writing the Australian dollar is buying 104.13 US cents.