Since yesterday morning, especially if we look at EUR/USD, we can see a very narrow sideways trading range. To my mind, it looks like everybody expects Barack Obama to remain president; thus that has been priced in. Currently it seems that the elections are not putting too much uncertainty into the market.
You wrote today in the Commerzbank's FX research that U.S. Dollar would suffer if there are longer delays in providing reliable results of elections. Could you please elaborate on this?
There are a couple of problems to tackle in the U.S, including the ‘fiscal cliff', which the U.S. has to deal with until the end of the year as well as to raise the debt ceiling again. Thus, there are a lot of difficult decisions to be taken and that means a strong government is needed. If we get some kind of results, where it is not clear who will be the next president, it is going to create a vacuum in a political environment that would cause problems. I think the market really would not appreciate such a scenario.
What performance do you expect if Mitt Romney wins the elections?
It is an outcome, which is definitely not the base scenario of most of market participants. However, I would assume that this would be Dollar positive but to a limited extent, because at least we might get speculation that QE3 might be cut back to some extent, because Mitt Romney mentioned a couple of times that he is sceptical about that approach. Nevertheless, I do not think that the market has a favourite outcome.
What is your forecast for EUR/USD and USD/JPY for the end of the year?
Currently we see some pressure on EUR/USD, which is more due to a difficult situation in Greece rather than the U.S. elections. What I mean is that Greece needs to get some funds very quickly, and that is very hard to see how the political leaders will manage to do that without losing too much of faith and damaging their strategy. That currently creates some problems. However, we are pretty sure that eventually Greece will get some money, because nobody wants to take the risk of Greece default and exit from the eurozone. That would be perceived very positively in the FX market, because the market always looks in the short term. That is why we would expect EUR/USD rates above 1.30 rather than below by the end of the year.
As to the USD/JPY pair, obviously it pretty much relies on the risk aversion, because even with national problems in Japan, the Yen is still perceived to be a safe haven currency. Thus, if those problems in the eurozone will be tackled and risk-appetite increases again, we might also see higher rates in USD/JPY.