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The re-election of President Barack Obama happened with relative ease when the results of yesterday’s election were announced. As we said yesterday in our “Trader’s guide to the US elections”, the markets were likely to stage a mild rally on the back of an Obama victory. The dollar has sold off and European stocks opened higher, US stock futures also point to a higher open for US equity markets later today.
Obama – the QE3 supporter
The markets like certainty and they know what an Obama Presidency looks like, hence the mild rally we are currently experiencing. Added to that, Obama is a QE3 supporter and had not threatened to oust Fed Governor Bernanke if he won the election (the Republicans are not fans of Bernanke or his QE3 programme). Thus, the Obama victory is considered a nod to QE3, which is dollar negative, hence the bounce higher in EURUSD earlier and the stalling of USDJPY. The question now is, can Greece de-rail things and bring the risk rally and dollar decline to a quick end?
Greece’s Budget vote on a knife edge
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As we move through the London session the headlines from the US election are having less potency and the focus shifts to Greece, which could be the next fundamental driver of the single currency. The markets are waiting for the Greek Budget vote, which is scheduled to take place sometime after 2000 GMT tonight. The Budget debate has already started in Athens, and MP’s are set to discuss (and most likely argue) about the 250 page Budget. The three-party coalition government has a fragile majority and already some MP’s have said that they will vote against all or part of the Budget, so it could be a long day and night in Athens.
EURUSD – Obama rally is half-hearted
This uncertainty is weighing on EURUSD today, which has backed away from 1.2880- the top of the daily cloud and a key resistance zone. The next key support level is 1.2830 – the 200-day sma. Some weak German industrial production data for September, which declined 1.8% in September much worse than the 0.7% fall expected, helped push EURUSD to test this key support zone, and cross below it at one stage. Below here the lows from Tuesday at 1.2765 come into view. The euro rally post the Obama election win was feeble, suggesting that the bulls are not on board and the bears still have control of the single currency. With the Greek Parliamentary vote looming and tomorrow’s ECB meeting unlikely to announce new measures to ease credit risk in the region, we may see a more sustained sell off as fundamental risks heat up. Below 1.2750 is a very bearish development for this cross, which opens the way to 1.2610 – the base of the daily Ichimoku cloud and a key support zone for this pair.
USDJPY rally thwarted for now
The election result in the US has stalled the rally in USDJPY. It is trading sideways at the moment between 79.70 and 80.40. US Treasury yields may remain subdued now that Obama has won, since it his victory is supportive of QE3 in the medium-term. This may keep a cap on USDJPY gains and a break of 80.80 – a key resistance level and top of the weekly Ichimoku cloud – seems unlikely in the medium-term.
Stocks near key technical resistance levels
The rally in stocks in Europe comes at a pivotal time as we approach annual highs in the major global indices. Today’s move in FX seems a little forced, which may suggest the rally in equities could be short lived. Not only are there key technical resistance levels at 2,600 in the Eurostoxx index and at 1,475 in SPX 500, there are also key fundamental events that may thwart equity rallies. In Europe the on-going sovereign crisis and the threat of Greek default could all weigh on European stocks, while the fiscal cliff in the US could hurt US stocks. Once the election hype is out of the way the focus may shift to how the US Congress will reach an agreement to avert toppling over the cliff edge at the start of 2013, which could dent GDP by 1.5% next year according to rating agency Fitch. Although both candidates pledged for their parties to work together over the next four years, Congress remains split with Republicans in charge of the House and Democrats controlling the Senate. Back in August 2011 they could not agree on whether to raise the debt ceiling and we expect a similar tussle between the two sides this time. Although Obama won with a fairly large majority in both the Electoral College system and the popular vote, we shall have to see if this gives him a mandate to force both sides to reach an agreement in the coming weeks. Back in 2011 the SPX 500 fell to 1,100 as a result of the stand-off on Capitol Hill, so watch out for volatility this time round.
Gold – the ultimate QE3 trade
Gold bulls have been major winners today in the commodity space. The yellow metal has proven yet again that it is the ultimate QE3 trade. It rallied sharply post the Obama win and moved above $1,700. The next key resistance level to watch is $1,740 – the 50-day sma. This cross is starting to look over-bought on the hourly MACD, which suggests some mild selling pressure could weigh on gold. Future gains for this cross will depend on risk sentiment remaining steady. If we see risk aversion rise out of the Greek Budget vote and US fiscal cliff fears then the gold rally may be short-lived.
Chart 1: Gold daily
Chart 2: EURUSD daily Ichimoku cloud chart
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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