USD weakens moderately as Democrats take House
- US midterm results see the Republicans holding the Senate as expected but the Democrats taking the House by a slightly wider margin than expected (27 seats versus 24 expected). The results are largely in line with expectation and while the USD weakens during Wednesday’s Asia trading (USD Index down nearly 0.6% from a high of 96.46 to 95.90), it recoups some of its decline during London/NY trading. As of Thursday morning Asia time, the USD Index is at 96.00, down only (0.3%) from its pre-election levels.
- As investors debate whether or not this post-election USD weakness will continue, the resignation of Attorney General Jeff Sessions overnight does bring to light the political tensions within the US that are likely to rise (a potential negative for USD). Markets will also pay attention to external drivers (Italy, Brexit and US – China trade tension), all of which will have a significant bearing on USD sentiment to year-end and beyond. Ahead of that brings tonight’s FOMC meeting likely to be a non-event.
Brexit looms closer
- The final sticking point regarding how UK can theoretically get out of its “temporary” customs union with the EU as a backstop now sees a “review mechanism” being discussed and noises from the Irish side appear positive. According to the BBC, Brexit Secretary Dominic Raab may announce "a moment of decisive progress" as early as tonight and possibly map out a game plan for November, potentially culminating in a vote on November 27 in Parliament. This has since been discredited by a government spokesperson, but PM May is said to invite ministers to read the Brexit text during an emergency Cabinet meeting which is expected to take place either tomorrow or Monday, according to Whitehall sources.
Little movement from RBNZ on policy assessment
- RBNZ board this morning leaves its policy assessment and OCR guidance practically unchanged. It brings its rate hike projections only marginally forward to Q2’2020 even as it raises NZ’s inflation forecasts. Governor Orr retains guidance that “we expect to keep the OCR at this level (1.75%) through 2019 and into 2020”. The statement does remove the comment that “the direction of our next OCR move could be up or down” but is replaced with “there are both upside and downside risks to our growth and inflation projections”…despite expected upgrades to GDP and CPI forecasts.
- Citi analysts think the RBNZ has missed its chance to remove the dovish side of its dual policy guidance after this week’s much better than expected Q3 labor market data and stronger than expected Q2 GDP and Q3 CPI data. Citi analysts think the risk of a policy error is rising and do not agree that the RBNZ needs to maintain the fence-sitting dual approach to policy. While Citi’s own forecasts show a near-term moderation in GDP growth, they now expect CPI inflation to exceed the RBNZ’s latest forecasts and maintain the view that the RBNZ will need to raise rates from Q3 next year (not Q2’2020).
EUR: Fails to lift even as USD weakens as Italy risks continue to hit sentiment
- Notwithstanding the weakness in USD post midterms, EUR fails to perform overnight, hitting a high of 1.1500 at one stage post US midterms but ending the NY session around the 1.1430 level, only slightly above pre-midterm election levels. Italian data deterioration continues to be the main concern as GDP, manufacturing confidence, CPI, PMIs and retail sales have all been very weak relative to consensus in recent days which continues to pressure the Italian government to retain its nocompromise stance on the 2019 budget deficit. Brussels has asked for a revised draft budgetary plan by November 13 but Italy shows few signs of backing down. November 21 is penciled-in as a date for EU action on Italy with November 13 the budget deadline for the Italian government.
This is an extract from the Daily Currency Update, dated 8th November 2018. Please approach a Citigold Relationship Manager if you would like more information.