FOREX ASIA UPDATE - USD

With the bulk of the uncertainty over the election outcome having passed, the USD was able to retrace recent weakness overnight, with EURUSD trading down to a low of 1.2746 from 1.2795.

The Democrats have secured control of the House and are inching closer to control of the Senate, with the balance depending on the outcome in Virginia. Orthodox opinion is that Democratic control of one or both houses of Congress is marginally USD-negative given concerns about trade and currency policy and headline risk from likely hearings on a range of topics.

However, the impact is likely to be mitigated by limits on what the Democrats can accomplish with a narrow majority and the centrist/conservative leanings of many of the newly elected Democratic legislators, and we do not expect a significant dollar selloff on this news, even if victory is also declared in the Senate. Of course in the coming months, energy markets could question the US's commitment to maintaining stability in Iraq, and higher oil prices due to supply concerns would be detrimental to the USD given the more mature stage of the US business cycle relative to Europe and Japan.

Of much greater concern for the USD is a further deterioration in US yields this week amid heightened focus in the press on housing market woes. At the same time, carry trades have suffered in the wake of hawkish comments from BOJ Governor Fukui on Tuesday and acknowledgement of carry trade activity by BOJ board member Mizuno yesterday, despite relatively little reaction in Japanese rates.

Todays Economic Indicator - the monthly trade balance is due at 1330 GMT and the market expects a reduction in the deficit to US$66 bln in September from US$69.9 bln in August. Perhaps of greater interest though will be the Uni of Michigan consumer sentiment index for November, where consensus is for an unchanged reading of 93.6.