USD – The dollar is higher against many of its peers this morning, supported as stocks and commodities both slip deep into the red.  The key event overnight was clearly the US Presidential election with Barack Obama securing a second term in office.  Despite the most expensive campaign in history, once the dust has settled the 2012 elections have resulted in a Democratic White House and Senate and a Republican House; the same makeup as before the contest.  However, with the election now out of the way, the market has quickly refocused its attention on the looming “fiscal cliff.”  Unless Obama can bridge the partisan gap, Bush-era tax cuts are set to expire at the end of the year while a series of draconian automatic spending cuts will kick in.  The measures could easily subtract 2–3% from GDP, likely sending the economy back into recession.  From today’s perspective, a deal seems far off with President Obama and Speaker of the House Bohner at loggerheads over fiscal policy. Consequently, and seemingly contradictorily, investors are turning to the dollar as a “safe-haven” instrument.  However, gains are being limited as the market prices in continued loose monetary policy from the Fed with the Dems controlling the White House.  While at this point the two parties seem far apart, if last year’s debt ceiling debate serves as an example, a last minute deal to avoid the cliff is still considered the most probable outcome.

EUR – The euro pared early gains as the outlook for the region grows increasingly gloomy.  A European Commission report released overnight showed that the region’s leaders expect the Eurozone economy as a whole to virtually grind to a standstill next year.  With the ongoing debt crisis weighing on the region’s weaker economies, the outlook for export-driven Germany is equally morose with Europe’s largest economy forecast to grow just 0.8% in 2013.  Region-wide growth is expected at 0.1%, down from a previous forecast of 1.0%.  Adding to the tensions, investors are anxiously waiting to see if the Greek parliament will pass measures containing structural reforms and spending cuts aimed at securing the nation’s next “bailout” tranche. Greece’s foreign creditors, namely Germany, have become increasingly open to easing conditions attached to several aid programs.  However, with German Chancellor Merkel embarking on a reelection campaign of her own, she may be less willing to capitulate to Greek complaints. 

GBP – Sterling is mixed this morning, falling against the dollar, while gaining versus the euro.  Trade is however relative quiet as investors await a key BoE decision due Thursday morning. While policymakers have been rather hawkish in tone lately, recent data suggests that the latest uptick in British GBP may be brief.  With the Bank’s current asset purchase program expiring this month, investors will be looking for any mention of the need to increase QE levels.

JPY – the yen has strengthened back below the key 80.0 mark against the dollar as stocks and commodities tumble.  With Obama securing reelection, the yield gap between US and Japanese short-term interest rates narrowed, giving investors less reason to hold yen-alternatives.  While the ongoing struggles in Europe and the “fiscal cliff” in the US will keep the “safe-haven” yen well supported, a strong break below 80 will likely spark interventionist rhetoric from Japanese policymakers.

Commodity Currencies – The commodity linked currencies are broadly lower this morning as investors seek safer assets.  The CAD pared early gains, heading back towards the higher end of its recent ranges as the price of oil – Canada’s main export – falls, and global stocks decline.  Similarly, the AUD is back towards the weaker end of its recent ranges after rallying overnight as investors look for less volatile assets.  Interestingly enough, yields on both Canadian and Australian government bonds are lower this morning as investors are increasingly attracted to both nations’ AAA credit rating.

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