How Election Outcomes Could Affect AUD and JPY

If you have read the international papers, you may know that there are two political developments that is worth paying attention to.

On August 21st, Australia held general elections for Prime Minister and if you recall, the votes were so tight that nearly 2 weeks later, there is still no clear winning. The country is in a political deadlock but thankfully this matter could be resolved in the coming week as Julia Gillard secures the support of a key independent Member of Parliament. Given how long the process has been drawn out for, the Aussie may rally as long as there is winner.

Meanwhile Japan has a leadership election within the Democratic Party on September 14th. This is not an open election but a secret ballot. The former secretary general of the ruling Democratic Party of Japan, Ichiro Ozawa, has already begun his campaign against Prime Minister Naoto Kan. Ozawa pledged direct government intervention in the currency market in his policy platform stating “as for any sharp rises in the Yen from now on, I will decisively take all possible measures including market intervention to protect Japan’s economy.” Elections for the top DPJ post are slated for later this month and if Kan loses, Ozawa would become Japan’s sixth Prime Minister in 4 years.

Based upon his comments, the Yen has become one of the key political platforms that Ozawa is running on.

This may pressure Kan to act on the Yen before the election if only to keep his job. Ozawa also promised 2 Trillion Yen or $23.7 Billion in economic stimulus, a measure double the size of that planned by Prime Minister Kan. To Kan’s credit, however, he intensified his tone of Yen comments by telling reporters today “excessive movement in the currency market is bad for the economy and financial markets,” and “I have the utmost recognition of this. We will take decisive action when necessary.”

A win by Ozawa would probably be positive for USD/JPY and negative for the Japanese Yen in particular because of his criticism against a strong currency.

What Matters More? The Good or the Bad

Every day, equities, currency and bond traders weigh the good news with the bad to determine if they want to buy or sell.

Today, there were just as many positive reports that should have helped to stabilize the markets but has instead failed to stem the bleeding in equities and currencies.

In a market environment where pessimism is being felt in the bones of investors, it has become increasingly difficult to shift market sentiment.

The US dollar and the Japanese Yen continued to outperform as risk aversion drags nearly all of the major currency pairs lower. Even though USD/JPY has remained unchanged, the EUR/USD and GBP/USD fell more than 200 pips.

The Good News: US Government Accelerates Efforts to Minimize Foreclosures

As investors remain nervous about the outlook for the global economy, good news has failed to have a positive impact on risk appetite. Today officials from the Treasury and the Federal Housing Finance Agency said that through Fannie Mae and Freddie Mac they plan on accelerating efforts to help homeowners that are facing foreclosures. This includes reducing interest rate and extending loan terms, which should have been perceived as a step in the right direction. More specifically, the mortgage servicers will help borrowers who are more than 90 days delinquent bring their monthly payments down to 38% of their gross income, which is now considered the threshold of affordability. For an American that earns $75,000 a year, affordable means monthly payments of $2375 or under.

In addition after falling to a record low, IBD/TIPP reported a material improvement in economic optimism.

The Bad News: Fears of GM Bankruptcy

However the market has completely shrugged off the positive developments and has instead chosen to focus on the fears that General Motors will be forced into bankruptcy. The White House has indicated that they are open to accelerating the loans previously approved for the auto industry while House Speaker Nancy Pelosi called on Congress to pass an emergency rescue package for the industry.

$25B loans were originally allocated to the automakers for developing more fuel-efficient vehicles, but the legislation could be changed to divert the money towards more urgent initiatives such as helping the automakers fend off bankruptcy.

Given President-elect Barack Obama’s pledge to help the auto industry last week, official support is inevitable. However if the government does not act fast, the market could push the automaker into bankruptcy. On Monday, analysts issued price targets of zero for GM’s stock. With 263k workers under their umbrella, General Motors could be too big to fail.

EUR: Pressured By Problems in the Banking Sector
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The Financial Markets’ Reaction to ObamaNation

Barack Hussein Obama is the 44th President of the United States, the first African American and the second youngest President.

In reaction to his election, the US dollar is marginally higher and the US stock market has opened lower. Regardless of the overwhelming support for Obama domestically and internationally, the equity markets tends to sell off when Republicans lose the election.

The only minor negative is that the Democrats did not secure the 60 seat majority that is needed to push reforms through easier.

Based upon a previous study that we have conducted, over the past 30 years regardless of what party wins the elections, the US dollar tends to appreciate in the 6 months following the election. However the US economy is in the worst shape since the Great Depression, which was nearly 80 years ago.

Like many of his predecessors, we expect Obama to do no more than pay lip service to the strong dollar policy. The dollar has already strengthened significantly and it would be counterproductive to engineer further strength in the greenback. In order to turn the US economy around, a weaker and not stronger currency is needed.

In this economic environment, Obama will have no choice but to boost government spending and adopt more protectionist policies, which could hurt the US dollar. Even though Obama has given the country renewed hope, he won’t be able to deliver any change for the financial markets until he becomes President on January 20th and even then, it will take time for him to implement new policies.

Therefore the recessionary trade is still on and US interest rates are headed lower.

Here are some of Obama’s financial related promises (from Obama’s editorial in USA Today):

1. I’ll give a tax break to 95% of workers and their families, and eliminate income taxes for seniors making under $50,000 a year. If you work, pay taxes and make less than $250,000, you won’t see your taxes increase by a single dime.

2. I’ll end tax breaks for corporations that ship our jobs overseas, and give them to companies that create jobs in America.

3. I’ll eliminate capital gains taxes for start-ups and small businesses, the engines of our job creation.

4. We’ll create 2 million jobs by rebuilding our crumbling infrastructure and laying broadband lines that reach every corner of the country.

5. I’ll invest $15 billion a year over the next decade in renewable energy, creating 5 million new green jobs that pay well, can’t be outsourced, and can help end our dependence on Middle East oil.