Rocking the Vote

• Americans head to the polls. Trump wins: USD, yields, and stocks rally. Harris wins or no immediate winner: short-term pullback in USD, yields, and stocks.

• RBA stands pat and appear to be in no rush to start easing policy. AUD outperforms.

• China’s services sector gains growth traction in October. CNH and Chinese stocks rise.

Financial markets brace for the outcome of the U.S. general election. USD is trading on the defensive mostly against commodity sensitive currencies. U.S. equity futures are up, and Treasury yields are consolidating near recent highs.

Exit polls will start to get reported after 5:00pm EST. Polls in the seven key battleground states close at the following times: Georgia 7:00pm EST. North Carolina 7:30pm EST. Pennsylvania and Michigan 8:00pm EST. Wisconsin and Arizona 9:00pm EST. Nevada 10:00pm EST.

The path to the presidency is expected to go down the wire. Some polls show Kamala Harris has slightly more states either solidly in her corner or leaning in her direction. Other polls show Donald Trump with the electoral college vote edge. Trump also has a narrow lead – albeit within the margin of error – in almost all the seven swing states.

If Trump wins, we expect USD and Treasury yields to rally. Fiscal and trade policies under a Trump presidency are inflationary. This could force the Fed to keep the policy rate restrictive for longer. However, Trump’s ambiguous currency policy is a USD headwind.

If Harris wins, we expect USD and Treasury yields to have a kneejerk drop before staging a recovery underpinned by a strong US economy. Fiscal and trade policies under a Harris presidency are less likely to complicate the Fed’s price stability mandate. This has neutral implications for USD and Treasury yields.

It’s possible we may not know the winner until days later which could weigh on USD. In the 2020 November 3 election, Joe Biden was declared the winner on November 7. During these four days of political uncertainty, USD fell by roughly 2%. However, in the five weeks it took to declare George W. Bush the winner in 2000, USD edged higher before drifting lower throughout December.

Another possibility is if the race is tied at 269 electoral votes. In this event, the winner will not be declared until January in a procedure known as “contingent election.” A contingent election would be conducted by a newly elected Congress on January 6. The 12th Amendment provides that the House of Representatives would elect the President, and the Senate would elect the Vice President.

Meanwhile, Democrats have greater odds of winning a majority in the House of Representatives and Republicans are favored to win the Senate. As such, a divided Congress is the most likely scenario in our view. The political gridlock will make it hard for the next president to implement major fiscal changes, meaning fiscal policy will remain a drag to growth in the next few years.

Check out our full U.S. election insights here and election day scorecard here.

The U.S. October ISM services index is today’s data highlight (3:00pm London). Headline is projected at 53.8 vs. 54.9 in September. The regional Fed ISM services prints and the U.S. S&P Global services PMI point to upside risk. Bottom line: irrespective of the U.S. election outcome, the Goldilocks U.S. macro backdrop of solid growth and modest disinflation continue to favor the dollar and Treasury yields.

GBP/USD is range bound under 1.3000. The U.K. BRC same store retail sales data was disappointing. The value of same store sales increased by just 0.3% y/y in October (consensus: 1.4%) vs. 1.7% in September partly due to the later timing of the school half-term. On Thursday, the Bank of England is widely expected to slash the policy rate 25bps to 4.75%.

USD/CAD is trading heavy under 1.3900. The Bank of Canada’s (BOC) publishes the Summary of Deliberations from its October meeting (6:30pm London). At its October 23 meeting, the BOC delivered on expectations and slashed the policy rate 50bps to 3.75%. Governor Macklem confirmed there was a “clear consensus” for a 50bps cut. Importantly, more easing is in the pipeline as the BOC highlighted “we anticipate cutting our policy rate further.” The market is pricing-in over 50% odds of follow-up 50bps cut in December and total easing of 100bps in the next 12 months.

CNH and Chinese equity markets rallied on faster China services sector growth momentum and prospect of a big fiscal thrust. The Caixin services PMI overshot expectations rising to a three-month high at 52.0 in October (consensus: 50.5) vs. 50.3 in September. Chinese policymakers are expected to unveil this week the details of their fiscal stimulus pledge. However, piling on more debt to support a burst property bubble is not the long-term solution China needs to address its huge debt overhang and rising deflation risks.

AUD/USD and Australian bond yields are up as markets trimmed RBA policy easing bets. As was widely expected, the RBA kept the cash rate target unchanged at 4.35% and stuck to its neutral policy guidance. The RBA reiterated “the Board is not ruling anything in or out” and “the need to remain vigilant to upside risks to inflation.”

The RBA cautioned again that underlying inflation remains too high and “that it will be some time yet before inflation is sustainably in the target range” but added “and approaching the midpoint.” Indeed, the RBA still projects trimmed-mean inflation to reach the midpoint of the 2-3% band in December 2026 despite lowering its GDP growth outlook across the projection horizon.

Meanwhile, RBA Governor Michele Bullock’s press conference comments were balanced. Bullock pointed out that the Board “didn’t explicitly discuss rate hike or cut scenarios” and emphasized “I think we have the right settings at the moment.” Markets imply a first full 25bps RBA cut for May 2025.

NZD/USD recovered slightly but is holding under 0.6000. The RBNZ November Financial Stability Report (FSR) highlighted that financial stability risks remain contained. Specifically, the FSR noted that while weakness in the domestic economy has become more pronounced, banks are in a strong financial position to manage loan defaults as capital ratios are comfortably above the RBNZ minimum requirements.

Nonetheless, the FSR warned that a severe recession remains the key risk to the New Zealand financial system. As such, the RBNZ has scope to keep easing aggressively to avoid a deeper economic downturn. The market has fully priced-in a 50bps policy rate cut at the November 27 meeting and implies a 32% probability of a larger 75bps move.