Dollar Slowly, Consistently Edges Lower As Equities Swing

The US Presidential elections have a long standing influence over investor confidence. The outcome of political power in the world’s largest economy can significantly influence growth, trade and financial regulation. However, as with any economic event, this particular driver is set within a hierarchy of fundamental impact. Regardless of who wins the election, it would still be a struggle to answer the United States’ Fiscal Cliff.

Furthermore, we have other big-ticket items such as the euro-area crisis, Chinese regime change and Japanese fiscal countdown that all denote a distinctive impact on global markets. With that in mind, we recognize the market’s unusual activity over the past 24 hours. It is very similar to how we approach the average NFPs release: even though the event’s outcome is not likely to have a lasting influence over a fundamentally-crowded market, the uncertainty its presence carries pumps volatility and sidelines trend generation.

Now, as we move forward, we may very well see risk trends regain traction and revive cross-market correlations. Through the past trading session, we witnessed a significant deviation between the standard "risk" measures. While the S&P 500 rallied sharply into resistance (13,300), the Forex’s safe haven US dollar was holding relatively steady. Soon after the NY market close, equities took to a quick reversal while the dollar accelerated into its decline with EUR/USD moving back above 1.2825 – yet another contradictory sentiment move.

As the election results started to take shape in the overnight, however, risk’s influence started to firm up. With the dollar holding onto its losses, the equity futures found a moderate bounce. Revived correlations are a strong step towards developing a lasting trend. Yet, does a resolution of the US vote equate to a better investment environment. The bigger, international concerns aside; the unconfirmed vote tally leaves the United States with a divided Congress that may struggle to force necessary budgetary changes to avoid the looming fiscal cliff.

Euro May Climb on US Crisis Distraction - Juncker
Most policy makers (fiscal and monetary) follow academic lines of thought in their expectations of how their efforts will impact their economies and currencies. However, every now-and-then there is an official that acknowledges the speculative influence in the market.

Euro Group head Jean-Claude Juncker revealed a streak of ‘trader’ in his outlook when he remarked early Wednesday morning that the US Fiscal Cliff could direct negative attention away from the euro-area (offsetting the more "cheerleading" effort in suggesting Europe’s fundamentals were better than those of the US and Japan). From a real world market perspective, the countdown to the United States’ self-imposed deficit adjustment can paint a far less stable situation than the more measured austerity balance in the eurozone.

That said, there are two variables in this austerity comparison. The euro’s own fundamental issues are more immediate than the end-of-the-year countdown for the US. This past session, Greece’s general strike set the backdrop to the Parliamentary vote on the new austerity bill (reportedly aiming to cut pensions by 15 percent and raise the retirement age). Spain’s Rajoy suggested he would not ask for a rescue unless forced to - saying he needed to be certain it would lower yields. Today is a Euro-risk lull. Thursday brings forecasts, meetings and the ECB decision.

Australian Dollar Presses Through Risk Trends on Improved Rate Outlook
Risk trends have shifted back and forth over the past 24 hours, yet the Aussie dollar maintained its bullish ambitions. While US equity futures took a dive through the early Wednesday trading session, AUD/USD held steady above 1.0400. This is partially due to the greenback’s own lack of commitment; but other, less investment-sensitive aussie pairs (AUD/NZD, AUD/CAD, GBP/AUD) have shown a consistent support for the commodity currency.

This additional strength can be easily traced back to the RBA. The central bank held its benchmark lending rate yesterday morning to catch a significant portion of the market off guard. With the market pricing in a 47 percent probability of a cut and 20 of 27 economists in a Bloomberg poll expecting the same, there was a surprise quotient. The 12-month rate outlook now calls for only 50 bps worth of cuts.

Japanese Yen: Officials Want Risk Trends, Stimulus to Weigh Currency
With the volatility on risk trends elevated, the Japanese yen is under scrutiny. However, policy officials are no doubt hoping that the US election results can sustain a buoyant outlook. Yesterday, BoJ Executive Director Hayakawa (in charge of monitoring the financial system) stated his belief that the bank’s new lending program (unlimited at a marginal 0.1 percent) could weaken the currency. His supposition was that this effort would translate into a pickup in carry interest. However, carry is a global factor and rates are low worldwide. What they need is true risk appetite.

New Zealand Dollar Advances after RBNZ Financial Report, Ahead of Jobs Data
Green RBNZ Governor Graeme Wheeler is keeping up the effort of stirring speculative interest in the kiwi. The central banker released the Financial Stability Report this morning. In the statement, Wheeler said stated that he believed it was unlikely that the kiwi exchange rate would fall significantly going forward – adding weight to his dismissal of QE. Up next, we have jobs figures for hard data.

Swiss Franc: FX Reserves Expected to Build, Though Euro Share Under Scrutiny
The Swiss National Bank already holds 432 billion francs in foreign currency reserves – a record for the group and one of the highest amongst its counterparts. The update for October is due in the upcoming European session and a fresh high is expected. However, those monitoring the EUR/CHF will be more concerned about the possible composition of holdings. The central bank has slowly diversified away from euros recently.