USD Declines as Early Results Favor Democrat Win in the House

USD Declines as Early Results Favor Democrat Win in the House       

• USD declines in early Asia hours as markets await US midterm results. Voting has closed and sentiment remains nervous as a larger than expected turnout is seen to favor Democrats in the House.

• Meanwhile, a strong US October non-manufacturing ISM Monday at 60.3 (vs. 59 expected, 61.6 prior), the first time that two consecutive months of non-manufacturing ISM are above 60. New orders remain strong, at 61.5 though employment moderates from the extremely high September levels at 59.7.

• Citi analysts expect no policy action at the FOMC meeting this week and no major changes to the statement. The Fed though is on track to hike again in December (already 75% discounted into US rates) but is unlikely to clearly signal this in this week’s statement. Further out, Minutes released on November 29 may include discussion of longer-term balance sheet policy and implementation of monetary policy. Citi analysts expect that the majority will favor the current floor system and project that balance sheet reduction will run at least until the end of 2019. Citi analysts maintain their call for a 25bp policy-range hike in December followed by hikes in March and June. This implies a terminal policy range of 2.75-3.00%, essentially at the median official estimate of “neutral.”

EUR: Euro area composite PMI revised up on rising prices but Italy risks key for now              

• Euro area composite PMI for October is revised higher to 53.1 (flash: 52.7), albeit still down by 1.1pts since September and lowest since Sep’16. Significantly, on prices, Markit notes that “prices data signals another sharp increase in company operating expenses. […] In response to higher costs, companies increased their output prices at a historically elevated rate”. However, there are large cross-country divergences, with (notably) the Italian composite PMI down sharply (by 3.1pts to 49.3).

• The biggest cause for concern in the Eurozone though remains Italy’s finances as Brussels asks for a revised draft budgetary plan by November 13. However, in an interview with the FT, Italy Deputy PM Di Maio shows few signs of backing down and believes that Italy’s expansionary budget will eventually become a model for rest of EU. November 21 is penciled-in as a date for EU action on Italy with November 13 the budget deadline for the Italian government.

Commodity bloc: NZD higher on solid jobs report; RBA expected to revise up growth/ employment forecasts but delay rate hikes to 2019 end

• NZ’s jobs report shows unemployment down from 4.4% to 3.9% on strong details with the prior month seeing a downward revision to 4.4%. Employment change is also positive, up 2.8%YoY versus just 2.0% expected and the QoQ measure beats by 1.1% versus 0.5% consensus. This is accompanied by a rise in the participation rate from 70.9% to 71.1% and with average hourly earnings also up 1.4% versus 0.8% expected. Markets await tomorrow’s RBNZ meeting where Citi analysts expect upward revisions to the RBNZ’s GDP and CPI forecasts for 2019.

• Meanwhile, RBA holds rates steady as expected and keeps guidance neutral. There are small tweaks to financial conditions, which have “tightened somewhat recently” and a minor tweak to terms of trade guidance but wages growth language is unchanged. Markets await new forecasts from the RBA Quarterly MPS this Friday where Citi analysts expect the Bank may likely raise its near term economic growth and lower its unemployment rate forecasts while leaving unchanged its inflation forecasts. Citi analysts also push back their call for the first RBA hike to Q4 2019 (previously Q2 2019) on the back of headwinds from the housing correction.

Asia EM: 7.00 not a key level on CNY; President Xi responds positively to Trump even as China data disappoints

• USDCNH fails to dip any further despite the various trade talk encouragement from Chinese and US officials and the PBoC trying to downplay the recent weakness in CNY/CNY. However note PBoC Adviser Ma Jun’s comments over the past 48 hours, saying the Bank does not see 7.00 as a key level for FX. Chinese President Xi does strike a promising note however, saying that he pledges China will open its markets to the world and vows to protect intellectual property of foreign companies.

• But disappointing data from China continues with the October China Services PMI at 50.8 versus 52.8 expected, the lowest since September 2017. The composite PMI also comes in weaker at 50.5 versus 52.1 prior with the new business index at the lowest since November 2008 at 50.1.

This is an extract from the Daily Currency Update, dated 7th November 2018. Please approach a Citigold Relationship Manager if you would like more information.