Weekly Forex Outlook: US Elections in the Currency Market Spotlight

While US employment data sent the greenback to a two-month high at the end of last week, investors are now waiting for the upcoming presidential election with most of them viewing the US jobs data as increasing the chances of a victory for President Obama. In the meantime, the euro touched a one-month low with the perspective to go further down amid concerns that Greece would struggle to secure bailout funds, as reported by Bloomberg on November 5.

**US Presidential Elections**
The US employment figures released on November 2 showed that US employers added 171,000 jobs in October, beating forecasts of a 125,000 rise. The data led to a dollar rally with traders and investors reducing expectations about how long the monetary easing of the US Federal Reserve would continue. Reuters reports that the Dollar Index, which measures the greenback’s performance against the currencies of major trading partners, rose to 80.629, its highest level since September 7.

And while most currency analysts view the US employment figures as positive for President Obama, a Republican victory is nevertheless seen as supportive for the greenback, given Mitt Romney’s position on monetary easing. “We suspect the Republican policy mix would be more positive for the U.S. dollar in the medium term,” notes Chris Turner, ING strategist, as quoted by Reuters.

**Greece Concerns Weigh on the Euro**
On November 5, Bloomberg reported that single currency fell against most of its counterparts with Greece’s Prime Minister Antonis Samaras facing obstacles from coalition partners as regards the upcoming vote on the terms of the latest bailout package. “The market is increasingly losing confidence that Greece might get its extended bailout money because the governing coalition is unravelling or disagreeing more and more,” notes Imre Speizer, a Westpac Banking Corp (ASX:WBC) strategist, as quoted by Bloomberg. “We’ve seen the euro fall and it looks like it wants to go lower.”

!m[Euro, Yen Off To A Weak Start](/uploads/story/717/thumbs/pic1_inline.png)In addition to the euro, the yen also lost ground on November 5, trading near its weakest level against the dollar since April, with futures traders increasing their bets that Japan’s currency will continue to decline versus the greenback to a six-month high. Reuters quotes Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ, as seeing the dollar as likely to maintain its uptrend against the yen. “The dollar charts look bullish and better economic fundamentals in the U.S. compared to Japan’s also favour the dollar.”

**EM Currencies, Mexican Peso**
At the end of last week, most emerging market (EM) currencies also lost ground against the greenback, with the notable exception of the Mexican peso. On November 4, Benoit Anne, emerging markets strategist at Societe Generale (EPA:GLE), told the Financial Times currency correspondent Alice Ross that there were two main reasons why the largely anticipated EM currencies rally failed to materialise, with one of them being the positioning of EM currencies, which became “victims of their own success.” The other main reason for the lack of a huge surge in EM currencies is the fear of intervention of central banks, which have been quite vocal about the side effects of quantitative easing. Yet, Mr Anne continues to believe that the backdrop is positive for emerging markets, but that it is taking a little more time to play out and trigger a strong rally.
Among the EM currencies, the Mexican peso is one of the most popular choices, with some investors playing on it account of its relation to the US recovery and the less dovish stance of Mexico’s central bank. Mr Anne however notes that that while the fundamentals and valuation picture of the peso are quite good, it could also suffer from its heavy positioning with investors likely to sell the Mexican peso first in the case of “a little shock to risk sentiment”.