Yesterday’s elections have come and gone without any major surprises which have provided the markets with confidence as the balance of power has shifted in the House of Representatives which represents some opposition to the current direction the government has taken. Checks and balances are an important part of a functioning government and now that some of the anti-business sentiment has been removed from the market, we may begin to see a turn-around assuming elected officials intend to listen to the People and put aside their partisan bickering.
However, we are not out of the woods yet. More important than yesterday’s elections is today’s FOMC meeting, where the Fed will embark on further monetary easing, the size of which is unknown. However, the most common expectation I have heard is that the market is expecting a total of around $500 billion, spread out over the course of 5 or 6 months. If we start with this as the expectation, then there are two scenarios where the Dollar may strengthen: if the actual figure is less than that amount, or if the actual amount is in-line with that amount. However, should the number come in larger than expected, then we could see additional Dollar weakness which has been the case over the course of the last 2 months. These are the short-term implications and there is bound to be increased volatility surrounding the release of the decision.
The long-term ramifications of QE2 may be quite different though. With the expectation that the change in political landscape will impact government spending, the focus now will be on jobs. Friday’s NFP report will be too soon to see if the elections have any impact, but because this has always been about confidence there should be a reasonable expectation that those figures will improve going forward.
So the market has started the day with continued risk appetite as both stocks and commodities are higher. Whether or not this lasts today will remain to be seen. There is noticeable weakness coming from the Aussie, as there is a sentiment that the RBA may have over-reached with its latest rate hike.
In the forex market:
Aussie (AUD): The Aussie is mostly lower as building approvals came in much lower than expected. There is also speculation that the RBA may have been too aggressive with its recent rate hike as the expected inflation as a result of QE2 may be priced in already. Of course if QE2 comes in larger than expected, then the Aussie could reverse in a heartbeat.
Kiwi (NZD): With the Aussie subdued, the Kiwi is leading the pack today as general risk appetite is pushing markets higher. With no news to speak of, the Kiwi will trade opposite the Dollar today.
Loonie (CAD): The Loonie is also higher as oil is trading just below $85. There is a sense that QE2 will push commodities higher regardless of size, as inflation if not seen here, may be felt around the globe. The Loonie is near a 2-week high. (Click chart to enlarge)
Euro (EUR): The Euro is slightly lower vs. the Dollar but still above the 1.40 level as the FOMC has diverted attention away from the Euro debt problems. For now. Tomorrow the ECB will have its rate policy meeting and while no change is expected, the statement will be important going forward.
Pound (GBP): The Pound is tracking higher as the BOE rate policy meeting is expected to produce no change in policy. However, should the FOMC meeting come in much larger than expected, than the BOE may become reactionary.
Dollar (USD): The Dollar is lower as would be expected when the market assumes that the Fed is going to flood the market with an additional $500 billion. I’ve laid out the possible scenarios above for what may happen leading to the FOMC. Expect volatility. The ADP employment change showed better than expected jobs growth.
Yen (JPY): The Yen is lower across the board as risk appetite has induced Yen selling. The Yen has moved higher vs. USD at around the same time as the ADP report. I wonder if it had any “help” from the BOJ? (Click chart to enlarge)
Yesterday’s elections were a step in the right direction to getting government spending under control. However we still have a long way to go to get back to economic health. While QE2 is going to have an impact on the Dollar, it’s not going to be the end of the world.
Getting back to financial responsibility is paramount to a healthy economy and hopefully politicians can put their differences aside to accomplish that goal.
So keep an eye out for the volatility which is bound to pick up both before and after the 2:15EST FOMC announcement, and be sure to trade cautiously!
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