The market remains obsessively focused on US election poll gazing. The risk remains hobbled, but signs of trader fatigue are setting in. The Fed committee left the Fed funds rates on hold but noted the case for a rate increase continues to strengthen, so the big question now is what could derail a December rate hike?
Traders are setting their crosshairs on Friday’s NFP. A shift in election probabilities notwithstanding, a +175K print could affirm our base case consensus view that the Feds will hike in December, whereas a print towards the low end of the current Bloomberg forecast, in the 148K-205K range, will raise doubts. Overall, the bar remains quite low for the Fed not to hike in December.
Election Musings
Of course, Trump win could alter the Fed’s view. Therefore, while I see the NFP as an important piece of the puzzle, there would likely be greater USD impact from a downside outlier as opposed to the upside. With election anxiety running high, a positive print is unlikely to send Fed rate hike probabilities shooting above 75 %, at least until the election dust settles as election risk continues to dominate the landscape
In the meantime, fear of the unknown will continue to drive sentiment, and with voting gap traps and black swans circling trader’s heads, the markets will become increasing defensive over the next few days. Indeed, chips are leaving the table as the Trump anxiety meter crescendos as we near the event horizon.
While Clinton’s recent demise is sounding like a “bad beat story“, she maintains a lead, albeit slim, in the critical projections in the Electoral College. Finally, it is nearing crunch time, and despite Trump’s political incorrectness, he performed with just enough temperament and humour to fascinate the masses and make this a real horse race. From my chair, it remains just too close to call and trading this event is looking more like a mug’s game by the day.
The Australian dollar continues to do what it does best and confuse traders with the lack of a definitive trend. Last night there was another upside down session. While the underlying support from both commodity prices and a neutral leaning RBA remain intact, the US election counterbalance is certainly weighing on risk sentiment and distorting the landscape. My sense is we should expect position squaring ahead of NFP, a small play on the event and then call it wrap until post-election. I anticipate the street will remain very light on outright US dollar risk from now through US election day.
In early data, the Australian Trade Deficit came in narrower at -1.2 bln vs. -1.7 bln.While the 29th consecutive deficit, the print was much narrower than expected especially in the face of the resilient Aussie dollar as exports surprisingly ticked up +2 %. I expect this print to give the Aussie some tail wind especially with the backdrop of the weaker USD sentiment. 
The NZD looked absorbing over the past 24 hours as Global Dairy Prices surge, inflation abates and with the surprising NZ employment print yesterday. Indeed, NZ’s frothing economy should suggest the RBNZ will reassess ahead of next week’s anticipated rate cut, but the recent surge in the kiwi dollar suggests otherwise, as the RBNZ will likely follow through with an interest rate cut, for fear of driving the NZD even higher.
The USD/JPY pair remains shaky; risk remains negative as safe havens are bought while the USD is sold. After the usual post-FOMC USD hijinks, which saw the spot kneejerk to 103.05 before recovering to 103.35, the downside momentum has temporarily abated. Traders have likely taken the katana to their long USD/JPY positions as election anxiety escalates. I expect little chance for near-term follow-through to the key 102.75 ahead of Friday’s NFP. US dollar outright risk may remain light versus the Yen but will continue to trade sensitive to moves in global equity markets.
Chinese yuan
There are too many near-term twists to have any clear short term view but provided the Feds stay on course for a December rate hike, and despite steady domestic comic data, capital outflows will continue to accelerate, and we should approach a year-end level of 6.80, all things staying equal.
Pre-election angst versus post-election guarded optimism has investors sidelined until the US election noise clears. However, given that the market will likely look towards the undervalued EM in the post-US election environment, the MYR may offer some excellent risk-reward in the month to come.
As Korea is still mired in its political scandal, given that political risk typically quickly abates, long USD positions are getting stretched.