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Collinson FX: November 9, 2018 - US markets settle

by Collinson FX 8 Nov 2018 21:28 PST 6 November 2018
Clockwork Orange - Start - PIC Coastal Classic - October 19, © Richard Gladwell

Collinson FX: November 9, 2018 - US markets settle

Markets were quiet and steady ahead of the FOMC announcement this morning (afternoon New York time). The fall-out from the US Mid-Term elections appears to be over. US equity markets rallied strongly, appearing to appreciate the electorates decision to elect a divided Government, which has historically succeeded. The Trump administration has put in place important settings to drive the economy forward over the next two years. They have cut taxes and regulations and have unleashed market forces. It is a ‘blue-sky’ outlook by markets and we will need to see how the Democrats use their new found power?

US Bonds held up ahead of the FOMC decision, supporting the US Dollar, which took a bath, following the US election. The Fed are expected to leave rates unchanged, but it is the rhetoric surrounding the scheduled rises, in December that will be watched closely. The RBNZ left rates unchanged, in a bullish statement, with Chairman Orr confirming his emotional state as ‘happy’. The RBNZ recognised the strong economic data, with revised CPI and employment numbers, to the upside. No rate rises is expected and NZ rates a operating in rare territory. They offer a discount on US rates, indicating US risk is higher thus offering a premium return on US investment. This is very rare and troubling.

The EUR slipped back below 1.1400, while the GBP dipped to 1.3090, as the Dollar rebounds. The Italian deficit/debt remains unsettling to European markets while ‘Brexit’ continues to destabilise Europe and the UK. The NZD held below 0.6800, after huge recent gains awaiting the FOMC, while the AUD looks to regain 0.7300.

Collinson FX: November 8, 2018 - RBNZ ponders

The US Mid-Term elections dominated the markets overnight. The result was a split decision, with the GOP holding on to the Senate (building on existing seats), while the Democrats regained the House. This will result in divided Government over the next two years, leading in to the next Presidential elections. The result was in line with market expectations and that was how it was received. Equities were steady, although bond yields drifted lower, while the US Dollar softened. The EUR pushed up to 1.1440, while the GBP spiked to 1.3130, which is still dominated by ‘Brexit’ negotiations.

Commodity currencies reflected the weakness in the reserve currency, with the NZD jumping to 0.6770, while the AUD jumped up to 0.7270. The strength in the NZD was boosted by extra strong NZ Employment data. The headline rate fell from 4.4%, to 3.9 %, while participation rose. This would have been pushing wages higher had the Government not decided to regulate wage rises. Markets determine labour rates a lot better than Governments! The markets now digest the split US Government and how it will operate. Important to the trade exposed countries is how China will react, in terms of their trade negotiations. They may move to leverage the Trump administration, although the extreme pressure on their economy will probably force their hand before the G20.

The RBNZ will announce their rate decision, which will probably be status quo, although interest remains high in the reaction to the US election and the strong local labour market. The Fed also meets, with interest high in their interpretation of the elections, while plotting the nations monetary policy. The split Government may encourage the Fed to leave rates unchanged to see how the economy functions under the new Government?

Collinson FX: November 7, 2018 - US Elections stall markets

The US Mid-Term elections have all but sidelined the markets. The US awaits the outcome, which will determine the US economic policy for the next 2 years. The polls indicate a Democratic victory but they were wrong in 2016!? If the Democrats win, then equities will crash and the Dollar will probably flounder. If the Democrats win just the ‘House’, then markets will not welcome the result. A victory for the Republicans will confirm the ‘Bull Market’.

The EUR trades 1.1400, despite mixed PMI results, while the GBP traded 1.3080. The GBP has been dominated by speculation surrounding a ‘Brexit’ agreement. An agreement should be a big positive for the currency, while the Europeans may look to the G20, as an incentive to come together?

The RBA left rates unchanged, but reviewed both employment and GDP growth upwards. The economy is going along well, despite political upheaval, but remains hamstrung by the US/China trade war. The US Mid-Terms may go a long way to determine a solution to this trade crises. The AUD holds 0.7200, while the NZD trades 0.6660, but all will depend upon the US elections.

Collinson FX: November 6, 2018 - Quiet start to huge week

A quiet start to what could be a ‘huge’ week!? The week will be dominated by the US Mid-Term elections. The outcome has the potential to dominate the direction of markets for the next year or so. If the Republicans retain both houses of Congress, then the Trump agenda will continue, with the booming US economy and sentiment. If the Republicans hold the Senate and lose the House, then the prospect of conflict and tempered direction could stagnate markets. A loss for the Republicans would spell economic disaster for Trump and his administration. He would be effectively become a ‘lame ‘duck’ until the Presidential elections in 2 years.

The impact on markets, of a Republican loss, would hit markets hard. Equities would fall, with the risk-on sentiment, while interest rates would soften. It is likely that he would get little done and the Democrats would ‘resist’ him at every turn. This would stagnate the economy and directly feed through to a weaker Dollar. A win would also set the platform for a trade deal with China, which would be positive for the trade dependent, Australia and NZ.

The RBA meets today, although Australia will be focused on the Melbourne Cup, but they are unlikely to move rates. The rhetoric will be noted, with spelled out risks, driving the local currency. The Fed and RBNZ are also scheduled to make their own decisions this week. The RBNZ will follow the RBA, but the Fed is likely to act and consider the political fallout from the election.

Keep your hats on for the Roller-coaster ride that will be US electoral turmoil. The AUD will open trade around 0.7200, while the NZD holds above 0.6650, both ready for a wild ride. Polls point to a Republican loss, but they did so in 2016, so Trump may shock the world again!?

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