US: How will USD react to midterm elections? – Nomura

Yujiro Goto, Research Analyst at Nomura, suggests that the US midterm elections will be a major market focus this week.

Key Quotes

“To trade into the midterm elections and trade the outcome, we dug deeper into recent G10 FX trading behaviour in relation to US rates and risk sentiment movements.

• USD/JPY is the cleanest pair to trade US midterm election risks in G10 FX market, in our view. Our estimate shows USD/JPY would move by about +/-1% in positive and negative surprise scenarios.
• Reactions from the commodity currencies may be less clear and we will focus on how EM currencies react as a trading guide.
• In a Republican victory scenario (securing the majority in both houses), we think JPY short against USD, EUR, GBP and NOK will be attractive. We are more cautious on commodity currency trading, as their sensitivity has been changing and we will look at how EM currencies trade. In a Democrat victory scenario (securing a majority in both houses), JPY long positions against EUR and GBP would be attractive. The main scenario of a twisted parliament (Republicans secure a majority in the Senate, while Democrats gain a majority in the House of Representatives), a USD/JPY dip would be just about 0.25%.
• We believe US fundamentals and Japan’s policy stance suggest room for a bigger rise in USD/JPY, and barring any negative surprises (Democrat victory), the mid-term USD/JPY trend remains positive. Thus, we recommend keeping USD/JPY long bias targeting 115 by end-December. If Democrats sweep both houses, we would reassess our bullish USD/JPY view for at least our near-future trading stance, while we expect dip buying demand to arise around 110.”