• Getting set. Risk assets outperformed overnight & the USD lost ground. A paring back of ‘Trump trades’ continued ahead of the big event.
• US election. Voting progressively closes later today. The battleground states are key. Bursts of market volatility look likely as results flow out.
• RBA holds. No change in rates or guidance. The RBA is standing out from the pack. Gradual/modest policy easing anticipated over 2025.
Risk assets outperformed overnight as voting in the US election got underway. Given the narrowing in opinion polls and probability gauges over recent days market participants have continued to hedge their bets and unwind ‘Trump trades’ that were put on. The various metrics indicate the two candidates are neck and neck, and the outcome is a toss-up. A better than anticipated US ISM services index print also helped the mood. Services providing industries make up the lions share of the US economy and the ISM shows this subset remains firmly in ‘expansionary’ territory with new orders and hiring intentions improving.
US equities rose with gains in tech stocks propelling the S&P500 ~1% higher. The S&P500 is back within ~2% of its record highs. Base metals and energy prices also increased with copper up ~0.5%. Bond yields consolidated with the US yield curve flattening a little after the 10yr rate dipped ~3bps (now ~4.27%) and the 2yr rate nudged up (+2bps to ~4.19%). A 25bp interest rate cut by the US Fed later this week (Fri morning AEDT) is priced in, with ~4 reductions discounted by mid-2025. In FX, the USD lost ground with EUR (now ~$1.0928) and GBP (now ~$1.3025) pushing higher, and USD/JPY a bit lower (now ~151.40). The NZD (now ~$0.5997) also ticked up, while the AUD (now ~$0.6635) was an outperformer thanks in part to the RBA’s ongoing relative ‘hawkish’ vibes at yesterday’s meeting.
The US election will dominate the airwaves and be a key driver over the period ahead. Exit polls are scheduled to be published later this morning (~9-10am AEDT). Voting progressively closes across the US in the hours after that (from ~11am Weds AEDT, with states equal to ~80% of the Electoral College closed by ~1pm Weds AEDT). The battleground states which typically decide the outcome (Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin) are the ones to watch. Also of note, last time out Virginia, which Pres Biden won, was called at ~11:36am AEDT. This may be an early indicator of how accurate the polls have been. VP Harris has a solid lead, but if the results are tight or favour former Pres. Trump it could be a sign the pollsters have got it wrong. That said, based on the use of mail-in voting, and prospect for recounts to be triggered and/or court challenges, a definitive overall result may not be known for days (or weeks). Bursts of volatility look likely as the results flow out. And given how things are now tracking we believe the stage is set for a binary reaction with a Trump win likely to see the USD strengthen due to his platform of protectionist trade tariffs, greater fiscal spending, and moves to curb US immigration. Conversely, a Harris victory might see the USD weaken as risk premium is removed and business as usual resumes (see Market Musings: US election – FX inflection point).
AUD Corner
The AUD has perked up a little over the past 24hrs thanks to a softer USD and positive risk sentiment as voting in the US election got underway (see above), and the RBA’s messaging (see below). At ~$0.6635 the AUD is back above its ~1-year average, with the AUD also outperforming on the crosses. The AUD has recorded gains of ~0.2-0.4% against the EUR, JPY, GBP, NZD, and CAD, while AUD/CNH edged up ~0.7%.
In terms of the RBA interest rates were held steady at 4.35% once again, where they have been since last November. Notably, forward looking guidance was also unchanged with the RBA noting underlying inflation “remains too high”, and it will be “some time yet” before it is sustainably in the target band and “approaching the midpoint”. In its updated forecasts inflation isn’t projected to reach 2.5% until H2 2026. As such, the RBA still “is not ruling anything in or out” and is flagging settings will “need to be sufficiently restrictive” until the board is confident things are on the right track. Overall, the rhetoric supports our long-held view that the RBA will at the back of the pack when it comes to interest rate cuts. We continue to believe that the start of a gradual and modest RBA easing cycle is a story for H1 2025. Interest rate markets are factoring in ~2 rate cuts by the RBA in 2025. Over the medium-term we think the diverging policy trends between the RBA and other central banks should be AUD supportive, especially versus EUR, CAD, GBP, and NZD.
However, near-term US politics and USD trends should have more say on what happens to AUD/USD. As outlined above and recent days, voting in the US progressively closes from 11am AEDT. But due to the closeness in the polls, use of mail-in votes, and chance of recounts/court challenges results may not be known for a while. This suggests there might be a period of market volatility as the election data generates false signals and/or until clear definitive trends emerge. Given how tight the US election is looking we feel the reaction to the outcome may be binary. As outlined previously, based on his policy platform a Trump win could see markets reprice the path forward for growth and inflation, which in turn might see the USD appreciate (AUD weaken). Conversely, a victory by VP Harris may see the USD depreciate (AUD strengthen). For more see Market Musings: US election – FX inflection point.
