US Dollar: How will election risks and tighter liquidity shape the outlook? - Danske Bank

Prediction markets favour Democrats for the House and assign them a strong chance in the Senate as the US holds its midterm elections today, according to Danske Research Team. Initial results are expected on Wednesday, although final outcomes could take weeks. Alongside unchanged Q4 borrowing plans and increased Q1 funding requirements, the team flags the possibility of tighter Dollar liquidity ahead of the April tax date.

What Could Election Results and Funding Trends Mean?

"In the US, the midterm elections will be held. Tentative results will be available by Wednesday morning, but final results could take weeks or even longer. Prediction markets and opinion polls favour the democrats to win a safe victory in the House of Representatives, while the Senate race is closer. Prediction markets price in around 76% probability that Democrats will gain enough seats to win a majority in the Senate."

"In the US, the ISM manufacturing index increased to 55.5 in October (cons.: 54.5, Sept.: 54.5), above consensus expectations for an unchanged reading. The details point to another month of strong activity in US manufacturing, with new orders edging higher and production increasing notably. Separately, the S&P Global manufacturing PMI was revised lower to 54.9 from 55.9, still indicating strong activity growth, though at a slower pace than the previous month and initially reported."

"Also in the US, QRA borrowing estimates contained no surprises for Q4. The borrowing estimate was lowered by USD 10bn due to a slightly higher-than-expected starting cash balance, as expected. The year-end cash balance target was maintained at USD 850bn."

"Borrowing will rise from USD 618bn in Q4 to USD 800bn in Q1, lifting the end-Q1 cash balance target to USD 1,000bn. This is slightly higher than usual and could contribute to tighter liquidity ahead of the April tax date."

"Finally from the US, we also got the Q4 Senior Loan Officer Opinion Survey, which was on the dovish side. Lending standards were little changed, but demand for C&I loans, CRE loans and mortgages all declined. This clearly points to tighter financial conditions having an effect. The Fed already had access to the survey at last week's meeting, which may have contributed to Warsh's more cautious tone."

"On the data front we get the JOLTs report for September."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)