Welcome back to the White House, Barack! Thanks to a late surge in votes, Obama surged ahead of Romney to win his second term as President. Obama took home 303 votes in the Electoral College, while also winning the popular vote 50% to 48%.
The markets “celebrated” Obama’s victory by buying up higher-yielding currencies, as another four years of Obama-time will most likely mean that the Fed will stick looser monetary policies. Take note that Romney has been vocal about his opposition to the central bank’s current accommodative policies, saying that if he were to win the Presidency, he’d instantly kick incumbent Fed head honcho Ben Bernanke to the curb.
With Obama still in charge though, Big Ben’s position is safe (for now) and we’ll most likely see the Fed continuing with its current strategy, which, for the most part, has been dollar bearish.
Interestingly enough though, by the end of the day, higher-yielding currencies lost their footing and gave back all of their gains.
Perhaps the markets began to realize that Obama’s policies could actually put a drag on growth, and therefore, risk sentiment down the road. Remember, Obama has mostly proposed higher taxes for multinational companies and high-income tax payers, as well as higher tax rates on capital gains and dividends. Yes, you read that right – forex traders like you and I will be affected, too!
While Obama does deserve a pat on the back for his landslide victory, I wouldn’t want to be in his shoes. As president, he faces the unenviable task of dealing with the fiscal cliff.
And this is precisely why the markets feel so uneasy. They fear that unless lawmakers can agree on the tax hikes and spending cuts due to take effect at the start of 2013, the U.S. will fall off the fiscal cliff and back into recession.
The problem is that Republicans and Democrats don’t always see eye to eye on economic issues (understatement of the year!). With Republicans in control of the House and Democrats in control of the Senate, the two sides are prone to political bickering, which could – as it often does – prevent the government from acting effectively and efficiently.
As you can see in the chart above, within the first few hours of Obama’s victory, the dollar was heavily sold off. The dollar index (USDX) dipped to as low as 80.749 before it found support. But after investors had fully processed the repercussions of Obama’s re-election, the USDX turned and undid all its losses to climb to a new intraday high.
This sort of reaction provides us with valuable insight as to what the traders are focused on at the moment – it tells us that the markets are very concerned about growth, so much so that it has affected their appetite for risk. Naturally, this begs the question: will we see a return to fundamentals or will risk sentiment continue to dictate price action?