Week Ahead: US Elections Casting A Long Shadow; What's The Trade?

Growing political uncertainty ahead of the US presidential election has already been weighing on USD across the board, consistent with FX price action ahead of US presidential elections spanning the last 40 years. Despite Clinton’s lead slipping in the polls of late,we think that the Democratic candidate will have a sufficient number of electoral votes to secure a victory, however.

The outcome will be supportive for USD and risk sentiment, and negative for the safe haven EUR and JPY if only because the uncertainty associated with a Trump presidency abates. FX volatility could subside as a result as well. We feel fairly comfortable in calling for renewed upside in AUD/JPY from here.

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While not our central scenario, a Trump victory represents a nonnegligible tail risk and a reason for investors to remain very cautious at the start of the next week. We suspect that a surprise win of the Republican candidate will bring to the fore fears about rampant US protectionism and economic uncertainty, at least initially. This should weigh on risk and USD and support EUR and JPY as well as FX vols.

A smorgasbord of data releases and a central bank meeting are on offer next week. We suspect, however, that investors will focus on the releases only once the outcome of the US election is known and presumably only if Clinton is the new US president. We expect the RBNZ to cut rates but doubt that it will flag the beginning of a new easing cycle. A ‘one and done’ cut may not be enough to keep NZD down if risk appetite recovers in the wake of the US election, however.

Domestic activity data out of the Eurozone and Japan may play only a secondary role, especially if investors’ demand for USD returns in the wake of the US election. Evidence that the Chinese FX reserves have dropped more than expected in October could rekindle bets on growing demand for USD-funding, and weigh on EUR and JPY against USD once again. GBP’s bounce on the back of abating ‘hard Brexit’ fears could be put to the test ahead of the industrial production data next week.

We believe that the latest build-up in US crude inventories is only the beginning of a more sustained correction, consistent with a wellestablished seasonal pattern. Oil prices could thus extend their losses, and continue to hurt CAD and NOK. The latter could also struggle if Norwegian inflation were to surprise on the downside again next week.