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As election uncertainty fades, central banks to dominate currency moves

With new polling indicating that Hillary Clinton’s lead over Donald Trump in the US presidential race has widened to double digits in the wake of last week’s debate and other controversies, markets have increasingly come to expect the likely prospect of a Clinton victory. However, the 2016 presidential campaign still has slightly more than two weeks to go, and an upset by the defiant Republican candidate remains a possibility, though currently rather slim. Markets have been pushed and pulled for weeks on speculation over the election, as well as other key events and conditions like company earnings season, fluctuations in energy prices, and the upcoming November/December Federal Reserve meetings.

For the currency markets, though, central bank outlooks remain front and center. On Monday morning, St. Louis Fed President and FOMC voting member, James Bullard, said that interest rates should be expected to stay “exceptionally low” for the foreseeable future. Despite this rather dovish pronouncement, market expectations of a December rate hike by the Fed remain high, well above 70%, and the US dollar has remained strong on the prospect of such a rate hike as well as on the likelihood of a non-Trump administration next year.

Other central banks have been even more market-moving as of late, including both the European Central Bank (ECB) and the Bank of Canada (BoC). Last week, the ECB kept its monetary policy and stimulus program unchanged, as widely expected, but also gave some dovish indications in leaving the door open for further stimulus measures possibly to be implemented at the next ECB meeting in December. At the same time, the central bank gave no indication of any tapering of its extensive quantitative easing program, which helped lead to a sharp plunge for EUR/USD last week. Likewise, the BoC ended up leaving monetary policy unchanged, but also downgraded its outlook for economic growth and indicated possible increases in stimulus measures on the horizon. This dovish talk, coupled with lower-than-expected economic data readings from Canada last week, prompted a further drop for the Canadian dollar against the strong US dollar, leading to an extended surge for USD/CAD. The fall of the Canadian dollar was exacerbated by weakening in crude oil prices on Monday, especially after reports surfaced that Iraq wishes to have no part in the recently discussed OPEC deal to cut crude oil production.

Slated for Tuesday, ECB President Mario Draghi will speak about monetary policy, potentially contributing to further volatility for the euro. Also on Tuesday, Bank of England Governor Mark Carney will testify on Brexit consequences, which could have a major effect on the already-beleaguered British pound. GBP/USD continues to stagnate just off its October “flash crash” lows as the specter of a “hard” Brexit, or UK exit from the European Union, looms ever closer.

In terms of currency impacts beyond this week, central banks will continue to be heavily dominant. Scheduled during a packed stretch next week are monetary policy decisions by the Reserve Bank of Australia, the Bank of Japan, the Bank of England, as well as the US Federal Reserve. Although the likelihood of the Fed announcing a rate hike in November is still very low only because the election follows just days later, any indications given about the likelihood of a December rate hike should have a clear impact on the US dollar as well as on equity and commodity markets.

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