The USD is lower across the board versus major currencies as the U.S. election enters its final stretch. The FBI investigation into Secretary Clinton’s emails has eroded her lead in the polls and the battle for swing states will be crucial. The eyes of the world will be watching as votes start coming in on November 8.
The U.S. Federal Reserve held rates unchanged on Wednesday as expected. The proximity to the elections kept odds of a rate hike on November’s Federal Open Market Committee (FOMC) meeting. The CME FedWatch tool is showing a 71.5 percent probability of a rate hike on December 14 based on Fed Fund futures prices. Economic fundamentals have taken a backseat awaiting the outcome of the 2016 American presidential elections.
A clear victory from either candidate would remove uncertainty and reduce short term volatility as the leadership vacuum would be filled. The USD would appreciate after being under the pressure of the final days ahead of the vote. There are different market scenarios depending on the actual make up of the outcome, but the worst case scenario for now would be a too-close-to-call result. A vote count that is not enough to give a decisive victory to either candidate would keep the leadership vacuum for longer triggering higher volatility in the markets.
The EUR/USD gained 1.702 percent in the last week. The single currency is trading at 1.1118 days ahead of the U.S. election. The combative campaigns to win the votes of American citizens will come to an end on November 8. The uncertainty surrounding the outcome has left the market in a volatile state, with little attention given to economic fundamentals until the issue of who will be the next U.S. president is settled. The fact that Donald Trump is not guaranteed to accept the results of the elections adds another layer of anxiety to an already bumpy road in 2016.
West Texas has lost 10.28 percent in the last week. The price of crude is trading at $43.86 and is near weekly lows. Energy is on a 6-day losing streak after the biggest factor pushing prices up this year is coming apart at the seams. The Organization of the Petroleum Exporting Countries (OPEC) agreement to cut production cut came as a surprise after the meeting in Algiers is now seriously in doubt. The rift between OPEC members appeared to have been mended, but ahead of the general meeting in Vienna old wounds are being reopened. Iran and Saudi Arabia are once again on opposite sides of the deal, and with Iraq’s lack of commitment to the production cut the impact would be limited.
The larger than expected weekly inventories last week sparked once again the supply glut conversation. Current prices have been tough for U.S. shale producers but production continues at a strong pace and imports have risen given the cheap price of energy. Saudi Arabia has ben asked to take a stronger leadership role, but as it stands they haven’t been able to convince OPEC and is questionable if they can really influence other non-OPEC major producers like Russia.
The price of gold has risen despite low inflation expectations in the U.S. and hawkish Fed that looks ready to pull the trigger on the much-awaited interest rate hike in December. The yellow metal gained 2.54 percent in the last 5 days. The U.S. election anxiety has overpowered the negative impact to gold as investors look for a safe haven amidst the political confusion with days to go before Americans head to the polls. The outlook for gold is for a correction following the November 8 vote in the U.S. but with the ever present possibility of a tie or a long process to identify the winner of the election there is still upside opportunities for the metal.
The rest of the week after the election results will be a time to recalibrate given the market jitters that have been present for the past two weeks. Macro economic conditions will have to be repriced in as a busy month awaits the markets in December. The Fed interest rate hike could have some monetary policy company as the European Central Bank (ECB) and the Bank of Japan (BOJ) have hinted at stimulus before the end of the year.
Market events to watch this week:
Monday, November 7
Tentative CNY Trade Balance
Tuesday, November 8
5:30am GBP Manufacturing Production m/m
All Day USD Presidential Election
Wednesday, November 9
11:30am USD Crude Oil Inventories
4:00pm NZD Official Cash Rate
5:00pm NZD RBNZ Press Conference
Thursday, November 10
9:30am USD Unemployment Claims
Friday, November 11
11:00am USD Prelim UoM Consumer Sentiment
11:50am CAD BOC Gov Poloz Speaks
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar