It could be a wild day for the Australian dollar thanks to the US midterm elections

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  • The Australian dollar drifted higher on Tuesday as traders largely sat out the session ahead of the US midterm elections.
  • In late trade, the Aussie is higher against all major crosses except the British pound that has been supported by continued speculation over a potential Brexit deal.
  • Polling stations in the US will begin to close from 10am AEDT.

The Australian dollar drifted higher on Tuesday as traders largely sat out the session ahead of the US midterm elections.

Here’s the scoreboard at 8am in Sydney on Wednesday.

AUD/USD 0.7224 , 0.0015 , 0.21%
AUD/JPY 81.96 , 0.37 , 0.45%
AUD/CNH 5.0004 , 0.0178 , 0.36%
AUD/EUR 0.6327 , 0.0008 , 0.13%
AUD/GBP 0.5516 , -0.0012 , -0.22%
AUD/NZD 1.0829 , 0.0011 , 0.10%
AUD/CAD 0.9483 , 0.003 , 0.32%

With the exception of the British pound, the common theme for the Aussie was modest gains, helped in part by thin trading volumes, modest gains in stocks and signs the Reserve Bank of Australia (RBA) is growing increasingly confident towards the outlook for the Australian economy.

“[The modest strength] in the Aussie owes something to yesterday’s post-RBA meeting statement where the Board flagged small upgrades to its growth and inflation forecasts and quarter-point downward revision to its 2020 unemployment rate forecast in Friday’s Statement on Monetary Policy,” said Ray Attrill, Head of FX Strategy at the NAB.

That helped push the AUD/USD to as high as .7241 in early North American trade before easing lower in the latter parts of the session.

AUD/USD Hourly Chart

Against the crosses, the Aussie also recorded modest gains against the Canadian dollar and Japanese yen — the former reflecting the impact of another plunge in the crude oil price while the latter was helped by the modest risk-on tone seen during the session.

Despite continued tensions between Italy and the European Commission over budget negotiations, the euro managed to crawl back most of its earlier session losses, ensuring only a modest decline against the Aussie.

The one exception to the broader trend was the British pound which continued to rally on speculation of an imminent Brexit breakthrough.

“It seems we’ve now graduated from an obsession with President Trump’s Twitter feed to interpreting the hand signals coming out of 10 Downing Street as a source of inspiration for market volatility,” Attrill mused.

“Thus a ‘thumbs up’ from UK Brexit secretary Dominic Raab out of a Cabinet meeting yesterday saw Sterling immediately jump to its best levels in two weeks. This was on the view that progress is being made towards a UK Brexit position with regards to the Irish backstop that could suffice to have EU Brexit Commissioner Michel Barnier being prepared to call an EU Summit for later this month.”

Attrill says a Brexit deal could easily see the GBP/USD surge another “five to six cents”.

Looking ahead, all attention today will be on outcome of the US midterm congressional election.

Polling stations will begin to close from 10am AEDT, and we may have an idea of whether the Democrats have a chance of flipping the House by sometime 3pm AEDT.

A Democrat majority in the house with the Republicans retaining the senate is the baseline case, hence is already likely to be largely priced in by markets.

A so-called “blue wave” with the Democrats taking control of both the house and senate is widely regarded as the result that will cause the largest risk-off reaction from investors. In contrast, should the Republicans retain control of both houses should act to support risk assets, especially those in the US.

While the election results will dominate proceedings today, there are some major data releases of note that may have an influence on individual currencies.

New Zealand will release Q3 unemployment data at 8.45am AEDT while Japanese labour cost earnings will also arrive at 11am AEDT.

Later in the session, other major data releases include German industrial production, Eurozone retail sales and US consumer credit.

The Reserve Bank of New Zealand will also announce its November monetary policy decision at 7am AEDT on Thursday morning.

Midterms 2018 LIVE: Follow along for live results and coverage of a wild election night