Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
Volatility looms as US heads to vote
Financial markets are braced for the biggest potential volatility event of the year as the US electorate heads to the polls on Tuesday.
The VIX, a key measure of volatility, neared the highest level since July’s Japanese yen-inspired sell-off.
With a wide variance in policies around trade and tax between Kamala Harris and Donald Trump, the financial impact will be consequential.
Recently, an increasing likelihood of a Trump win has seen the US dollar climb, while a Harris win is seen as more positive for trade-based currencies like the Australian and NZ dollars. The Singapore and Chinese yuan might also benefit from a Harris win.
Overnight, the US dollar index climbed from two-week highs.
Aussie vulnerable ahead of RBA
Before the US election, however, we have the Reserve Bank of Australia decision. The RBA rate decision will be announced at 2.30pm AEDT.
The RBA looks likely to declare an unchanged cash rate of 4.35%, but we believe that its tone toward inflation may change to one that is more dovish.
We believe it would be more appropriate to point out that headline inflation is now back inside the target band after the release of Q3 inflation data last week, and that encouraging progress is being made in bringing core inflation back towards that band, rather than restating the statement that “inflation remains above target and is proving persistent.”
We believe that slight downward adjustments to staff inflation projections, which take into account technical assumptions like a lower global oil price and a higher market implied cash rate profile, might support this change.
Overall, we believe the RBA is still on course to issue its first rate cut of 25 basis points in February of next year.
A strategically bearish stance on AUD/USD is necessary going into the US election because of the AUD/USD’s comparatively strong short-term sensitivity to US-China tariffs.
Next key resistance for AUD/USD is at 0.6656 at the 200-day moving average.
Loonie eyes incoming labor statistics
While the RBA is reluctant to cut, it’s the complete opposite picture in Canada.
The Bank of Canada recently lowered the policy rate by 50 basis points. Although there is a significant chance of another 50-bps rate decrease, we continue to forecast for a 25-bps rate cut in December.
The extent of the next rate cut by the BoC would probably depend on the incoming labor statistics, barring any inflationary shocks.
The most recent monetary policy report also included the BoC’s growth estimate. If growth data falls short of the BoC’s own projections, rates might go more in the direction of a 50-basis point cut.
If trade disputes are avoided and Canada benefits from a fiscal boost to the US, CAD may outperform other G10 high-beta currencies.
The USD/CAD is now at 2024 highs, reaching the high at 1.3959 on 1 November, but momentum indicators like the RSI now look to reverse lower.
Aussie gives up gains ahead of RBA
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 4 – 9 November
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
