US election result to have greatest impact on currency

11.06 AEDT, Wednesday 7 November 2012

US election result to have greatest impact on currency and commodity markets

By Ric Spooner (Chief Market Analyst, CMC Markets)

Last night’s price action gave an insight into the likelihood that the biggest market impact from an Obama victory will be in the US dollar and commodities.

Currency traders will also be focussed on the passage of budget legislation through the Greek Parliament this week. However, assuming this happens, an Obama victory leaves the way open for near term weakness in the US dollar and consequently stronger commodity markets. Precious metals in particular may benefit from this scenario and it appears markets are now positioning for an Obama victory.

An Obama victory makes it highly likely that Mr Bernanke will be replaced by a likeminded Fed Governor when his term expires in 2014. This means continued expansionary monetary policy into 2014 and beyond if required. This is a potentially bearish scenario for the US Dollar and bullish for gold.

At the same time, concerns over resolution of the fiscal cliff may also be bearish for the US Dollar. In the near term, these concerns are likely to be heightened if Mr Obama is returned as President but the Republicans retain control of Congress.

Historically, the election result has not usually led to major stock market moves. This is partly because the market often has a clear view of who is favourite prior the election. In this case, although the result is more uncertain it is not so clear which candidate will produce the best result for the overall market and economy. The healthcare and defence sectors will respond positively to a Romney victory. However, the overall market is likely to remain cautious until the fiscal cliff problem is satisfactorily resolved.

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