USD FX: Obama Priced In

From a confidential source(copy-cough-cough-righted):

USD: Obama priced in

USDJPY fell to below 96.50 levels on Friday before recovering through the European session and then traded sideways for most of the US session around current levels of 98.50. In that time period EURUSD has traded sideways, oscillating around 1.2750 levels. Equity markets finished higher on Friday, with the S&P500 rising by 1.5%, but still posted its worst monthly performance since Oct '87. Libor markets showed some further signs of normalization, with the 3-month libor over OIS spreads narrowing to 2.38%, but still a far cry from 6-8bp that characterised pre-credit crunch trading. Curiously, while libor-OIS spreads are contracting for the US, Australia and New Zealand, they are widening in the UK.

Economic data on Friday in the US was recession-like. The Chicago PMI for October fell to 37.8, down from 56.7 in September, and the weakest reading since 2001. The final reading on the October Uni of Michigan consumer sentiment index was 57.6, down from 70.3 in September, and the largest decline since the survey was initiated in the 1950s. Finally, personal spending fell by 0.3% m/m in September - the worst monthly decline since May 2005.

In the week ahead, markets will be distracted by the presidential election on Tuesday, with on-line bookies giving a 87% chance that Senator Barack Obama will secure the presidency. The congressional elections will also be very important, as the Democrats could potentially get a filibuster-proof majority of 60 seats. The Carter administration was the last time the president had the benefit of the filibuster-proof majority. With the result largely priced in, we are not expecting a significant impact on the currency markets. Longer term arguably the prospect of a more rapid exiting of Iraq could be construed as positive for the dollar, while concerns over Obama's attitudes towards free trade could be viewed as negative for the dollar.

On the data front, we have some important updates for October. We expect Friday's payrolls to show a 250k decline, while the ISMs should register well below the 50 level that demarcates contraction and expansion. Finally, pending home sales will also likely show a decline. We remain bullish on the US dollar, and rate cuts by the BoE and the ECB on Thursday should help to support the currency.