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• Trump closes in on Harris’s lead in the polls
• Neck and neck race spurs market jitters
• Outcome still hinges on battleground states

Trump narrows the gap

The time for Americans to vote for a new president is drawing ever closer, but who will win on November 5 is looking a lot less certain now than it did when Vice President Kamala Harris entered the race. Whilst Harris is still ahead in most opinion polls, her lead has narrowed significantly over the past ten days, with Donald Trump enjoying a sizeable surge in voting intentions.

Key policy differences

Not a lot has changed on the policy front when it comes to the two candidates’ agendas since our last report. Trump is proposing big tax cuts across the board while Harris is prioritizing low-income workers and small businesses. Harris’s other economic proposals include support for first-time home buyers and an end to price gouging for groceries.

Trump has no specific policies on the cost-of-living crisis but has promised to “end inflation” and lower interest rates, raising question marks about the Fed’s independence under a second Trump term. But this may be quite a difficult challenge to achieve for Trump given that higher tariffs are a central part of his campaign.

On immigration, Trump is promising mass deportations of illegal entrants, forcing Harris to toughen up her position as well, with a crackdown on asylum claims. There’s little differentiating Harris from Biden on foreign policy, while Trump thinks he can negotiate quick deals to end the wars in Ukraine and the Middle East, marking a return to his isolationist stance.

Abortion and climate change make the list

Climate change and abortion are other notable hot topics in the 2024 election campaign. Abortion is perhaps Trump’s weakest point that will probably cost him significant votes, but it is a winning point for Harris, who is a staunch defender of abortion rights.

On energy, Trump wants to encourage more oil and gas drilling and questions the scientific evidence on climate change. But whilst Harris is all for renewable energy, she has backtracked on her opposition to fracking and no longer supports a mandate for electric vehicles.

Who controls Congress matters

All in all, there is quite a bit of ambiguity in both candidates’ policies, even on taxes. For example, Trump’s proposal to cut the corporate tax rate to 15% might only apply to companies that manufacture their goods in the US, while Harris wants to extend the 2017 tax cuts set to expire in 2025 only to those earning less than $400,000.

But the biggest uncertainty is that the policies that will eventually get through Congress will depend on the composition of the Senate and the House, as well as the state of the country’s finances. For financial markets, this will be the more important outcome.

Markets prefer a split Congress

A split Congress with either Trump or Harris as president is seen as the safest result for investors, as Republicans would almost certainly rein in uncontrolled spending by a Harris administration, and Democrats are unlikely to back unfunded tax cuts by Trump 2.0.

However, should Republicans gain control of both the House and the Senate, Trump would be able to easily push through his proposed tax cuts while slashing spending. But the spending cuts are not projected to match the scale of tax reductions, leading to a worrying rise in the budget deficit at a time when America’s mounting debt level is already more than 120% the size of its GDP.

On the other hand, a ‘Blue Sweep’ by the Democrats is the least likely outcome. Hence, there’s little prospect of Kamala Harris’s plans for higher corporation and capital gains taxes ever seeing the light of day, as Republicans would never support them.

Inflation risk with Trump presidency

On the whole, though, investor enthusiasm for the Republicans isn’t quite as strong as it was in the previous two elections with Trump as their nominee, primarily due to concerns about US debt and inflation. Trump’s recent revival in the polls triggered a selloff in US and global bonds on the expectation that his policies of higher tariffs and lower taxes would be inflationary while raising government borrowing.

With Treasury yields subsequently surging, the US dollar is strengthening even before Trump has taken office. The longer-term outlook for the greenback is also bullish under a Trump presidency, although it’s likely to be more volatile, especially in the immediate aftermath of the election as investors process the result.

Democrats less of a boost for the dollar and stocks

However, should Harris pull off a win, the initial reaction could be a reversal of the dollar’s latest rally. Its longer-term prospects would also be less bullish than in a Trump presidency, although possibly not as bearish as some of the forecasts suggest. If Harris were to successfully pass most of her proposals for helping low- and middle-income earners, the boost to consumption and therefore to the economy would not be too dissimilar to that from tax cuts.

Risk assets also stand to benefit more from Trump and a Republican-controlled Congress than from a Harris administration, although the picture isn’t so clear. Wall Street would broadly gain from a cut in the corporate tax rate and less regulation. But if the tax cuts fuel inflationary pressures and the situation is made worse by an increase in tariffs, not just on Chinese imports but on all imports, stocks will struggle to rally if higher prices keep the Fed from cutting interest rates.

Energy under the spotlight

However, within the bearish scenario for equities, there are sectors that would probably continue to perform well such as energy and defence.

If Harris were to enter the White House, green energy stocks would likely do better than oil and gas stocks, and the tech sector might benefit too despite the risk of greater regulation. Moreover, the stock market generally would be lifted by Fed rate cuts under the Democrats as inflation and out-of-control borrowing would be less of a threat, while Harris’s more predictable nature compared to Trump’s might also be more positive for Wall Street.

Mixed outlook for commodities

For commodities, there’s no clear-cut outcome either. A stronger dollar under Trump might pressure gold, but the political uncertainty he would generate would surely stoke safe haven demand. If Harris wins, a continuation of gold’s bullish trend is more certain.

Meanwhile, oil would probably enjoy greater demand from a potentially stronger economy if Trump cuts taxes, but greater supply expectations from more drilling could offset some of the gains. Whereas, with Harris, there is some confusion as to how far she would go in opposing new fossil fuel projects and in reality, not much may change from Biden’s policies.

A win-win for cryptos?

One of the biggest reactions to the shifts in opinion polls has been in cryptocurrencies. Trump’s pro-crypto stance threw a lifeline to bitcoin and other digital currencies after the ETF-driven rally faded.

More recently, bitcoin is on the rise again, not just from Trump’s gains in the polls but also from Harris’s plan to introduce a regulatory framework for cryptos. Whilst this may not be as much of a boost to the industry as Trump’s ideas, it would nevertheless increase confidence in digital assets. Thus, it seems that the 2024 election campaign has been broadly positive for cryptos.

Swing states hold the key

As we get closer to Election Day, there is increased focus on the swing states that look set to determine who will get to sit in the Oval Office. The seven swing states are Arizona, Georgia, Pennsylvania, Michigan, North Carolina, Nevada and Wisconsin.

Most polls indicate Trump seems to have an edge in Arizona and North Carolina, and Harris is ahead in Nevada and Wisconsin. Interestingly, Harris’ ability to raise a record amount of funds, far outstripping the donations to Trump, doesn’t appear to be aiding her much in the final days of campaigning. Betting markets and many investors are putting the odds in favour of Trump.

Will Trump challenge the results?

But the polls keep changing day-to-day, making this one of the tightest races ever and raising the prospect of the Trump team contesting the results should Harris win by a very slim margin. This is the worst-case scenario for the markets, one that could drag on for weeks, if not months, creating political uncertainty in the United States at a time of heightened geopolitical tensions globally.

The EURJPY pair hit a new 14-week high near 164.50 during the European session on Wednesday. This rise comes even as some European Central Bank (ECB) officials hint that the Deposit Facility Rate, currently at 3.25%, might drop below neutral levels due to worries about low economic growth in the Eurozone. Officials believe inflation could stay below 2%, and Germany's economy is expected to shrink by 0.2% this year, marking the second year of contraction.

While traders have already factored in another ECB rate cut in December, this has weakened the Euro against other major currencies. However, the Euro has strengthened against the Japanese Yen amid uncertainty around whether the Bank of Japan (BoJ) will raise interest rates this year. BoJ's next meeting is set for October 31, but many expect no rate hikes, especially with upcoming U.S. elections adding to global economic uncertainty.

EURJPY – D1 Timeframe

Price recently broke below the previous low, and has reached the pivot zone on the daily timeframe of EURJPY, with an impulsive move over the last couple of hours. The pivot zone falls within the 76% of the Fibonacci retracement, which is another crucial confluence in favor of the bearish continuation. The pivot zone also overlaps a critical rally-base-drop supply zone; a change of character on the lower timeframe would be an optimal entry for a bearish movement.

Analyst’s Expectations:

• Direction: Bearish
• Target: 159.667
• Invalidation: 166.709

• CADJPY broke resistance zone
• Likely to rise to resistance level 112.00

CADJPY recently broke the resistance zone between the resistance level 110.00 (which stopped the previous impulse wave 1) intersecting with the 50% Fibonacci correction of the downward correction from the start of July.

The breakout of this resistance zone accelerated the active short-term impulse wave 3 of the higher impulse wave (3) from the start of September.

Given the strongly bearish yen sentiment seen across the FX markets today, CADJPY can be expected to rise toward the next resistance level 112.00 (which stopped the previous correction B).

• Natural gas reversed from support zone
• Likely to rise to resistance level 3.150

Natural gas recently reversed up from the support zone between the support level 2.665 (former minor resistance from September) intersecting with the lower daily Bollinger Band and the 50% Fibonacci correction of the upward impulse from August.

The upward reversal from this support zone started the active medium-term impulse wave (3) – which belongs to the longer-term impulse wave 3.

Natural gas can be expected to rise toward the next resistance level 3.150 (which stopped the three earlier impulse waves (3), (5) and (1)).

At an event today, ECB President Christine Lagarde expressed contentment with the current inflation levels, stating that the central bank is "rather satisfied" as inflation has slowed to below the 2% target.

However, she emphasized that the central bank is keeping a close watch on economic growth, as it significantly influences inflationary trends. Lagarde pointed out, "We are attentive to growth because it impacts inflation. It’s different from the Fed,” highlighting a key difference in policy focus compared to Fed.

Separately, Chief Economist Philip Lane acknowledged that while "some of the recent data raised some questions about the recovery," the overall outlook remains positive.

Lane affirmed that the narrative of a good economic recovery is still "very close to the baseline." Lane highlighted "fundamental reasons" to expect a rebound in consumption and investment for the remainder of this year and into the next.

The Bottom Line:

• The BoC made the leap to cut the overnight rate by 50 bps today, amid accumulating evidence that the economy and labour markets are weakening by more than what is necessary to achieve the 2% inflation target.
• The reduction won’t be the last one. The level of the overnight rate is still restrictive at 3.75% and the BoC in the press release hinted at future rate cuts will follow to support a return to stronger GDP growth.

Impact to Our Forecasts:

•  We continue to expect one more 50-bps rate cut from the BoC this December to bring the overnight rate to the top end of the BoC’s estimate of its neutral range (3.25%) before a return to a more gradual pace of easing in 2025.
• Our base-case macroeconomic forecasts are weaker than the BoC’s. We think real GDP growth is more likely to stay subdued for longer in Canada as interest rates remain restrictive until 2025.
• We expect GDP growth of 1.3% in 2025, below the BoC’s projection of 2.1% and not meaningfully different from ~1% growth expected for this year.
• We also expect labour markets will continue to soften, with unemployment rate rising to 7% in the coming quarters and for softening activities combined to bring more disinflationary pressures in 2025.
• In terms of the terminal level of interest rates, we think BoC will cut to 2% by July next year, stimulative and a touch below the lower bound of the BoC’s own estimates of neutral rate at 2.25% - 3.25%.

The Details (meeting recap):

• BoC’s rate cut today was close to fully priced in in markets ahead of the meeting. Adding to odds of the 50-bps cut were the Q3 Business Outlook Survey and September’s inflation data last week, both pointed to lower present and future expected inflation in Canada.
• Governor Macklem led off his press conference saying that “we are back to low inflation” in Canada. Rather than focusing on a weak economy and the disinflation pressures that could follow, the BoC today highlighted balanced risks on inflation.
• On the upside, shelter and wage growth remain the main concerns but are both expected to slow. On the downside, a slower economic recovery (as we are anticipating) is "the biggest risk".
• With the output gap still deeply negative (the BoC's estimate was -0.75% to -1.75% in Q3) and monetary policy still restrictive, we think it'll take longer for demand to rebound and excess supply in the economy to be absorbed.
• Rate cuts will boost the economy with a lag. Even with interest rates moving lower, many borrowers can continue to expect debt payments to go up in the years ahead. That speaks to more urgency to “front-load” the easing.

The Bank of Canada (BoC) cut its overnight rate by 50 basis points, to 3.75%, while stating that it will continue with normalizing its balance sheet.

With inflation having "declined significantly" over the last few months, the bank said it "expects inflation to remain close to the target over the projection horizon." Notably in the Bank's Monetary Policy report (MPR), the quarterly forecast for core inflation is unchanged at +2%.

The bank highlighted the moderate pace of economic growth, stating "the economy grew at around 2% in the first half of the year and we expect growth of 1¾% in the second half. Consumption has continued to grow but is declining on a per person basis." The Bank expected GDP growth to "strengthen gradually" over the coming quarters supported by lower interest rates.

On the future path of policy, the bank noted that "if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further." However, it also noted that the timing and pace of further reductions will be guided by the data.

Key Implications

Now that headline CPI inflation has dropped below the 2% target, the BoC has gained confidence that it can cut rates at a quicker pace. While there isn't much in the way of a changing economic narrative - slow GDP growth and core inflation above 2% remain - the central bank is set on doing what it can to boost economic growth. Will a 50 bp move achieve this? Probably not, but the central bank felt it should do something with economic data continuing to show that the country is stuck in a rut. Hopefully we get a bit more clarity on this in the press conference.

This won't be the end of rate cuts. Even with the succession of policy cuts since June, rates are still way too high given the state of the economy. To bring rates into better balance, we have another 150 bps in cuts penciled in through 2025. So while the pace of cuts going forward is now highly uncertain, the direction for rates is firmly downwards.

Daily Pivots: (S1) 1.3805; (P) 1.3825; (R1) 1.3835; More...

USD/CAD's from 1.3418 is extending in early US session. Intraday bias stays on the upside for retest of 1.3946/76 key resistance zone. Strong resistance might be seen there to limit upside. However, break of 1.3746 support is needed to confirm short term topping. Otherwise, further rise will remain in favor in case of retreat.

In the bigger picture, sideway consolidation pattern from 1.3976 (2022 high) might still extend further. While another decline cannot be ruled out, strong support should emerge above 1.2947 resistance turned support to bring rebound. Rise from 1.2005 (2021 low) is still in favor to resume at a later stage.

A growing debate is emerging among ECB policymakers about whether to accelerate the pace of rate cuts, with some members suggesting a potential 50 bps reduction in December. The possibility arises after inflation data in September came in significantly lower than expected, fueling discussions on the appropriate policy response.

Portuguese ECB Governing Council member Mario Centeno signaled openness to a larger cut, telling CNBC, “Certainly 50 basis points can be on the table because we continue to be data dependent and the data we are getting points in that direction.” He emphasized the surprising nature of the recent inflation figures, stating, “The truth is that the print of inflation in September was very low, way lower than what we were expecting.”

Echoing the possibility of a sizable rate reduction, Dutch ECB Governing Council member Klaas Knot acknowledged that a half-point interest rate cut could not be excluded at the December meeting. However, he cautioned that such a move would require further economic deterioration. “I would also say that I see the risks surrounding that baseline as reasonably contained,” Knot added, suggesting that while the option is on the table, it is not yet the central scenario.

On a more cautious note, Austrian ECB Governing Council member Robert Holzmann expressed skepticism about the need for a 50 bps cut under current conditions. Speaking to CNBC, Holzmann said, “I’m sure some of my colleagues will go for a big cut, others not. In my case, I will say I will look at the data.” He added, “If things really get as bad as some claim, we can have another 25, 50 I would say at the moment with the data, no.”