By Ben Robson
The week of the US Mid-term elections is finally upon us with politicians from both the Republicans and Democrats hailing it as one of the most crucial and significant elections in recent history. Markets have been in a state of flux since early October as they get to grips with Republican fiscal easing and Fed monetary tightening. This week, on November 6th, there is a possibility that the Democrats may gain a majority in both the House of Representatives and the Senate, thus reigning in a rampaging President. Alternatively, the status quo of a current Republican majority in both the House and Senate may stay intact. The most likely outcome is perceived as the Democrats taking control of the House. If this outcome prevails, then the startling antics of US president Trump may start to be contained. Only the American people can decide what they want! And from this the markets will take their lead.
Outside of the US mid-terms a very interesting trading dynamic is setting up between three currencies; namely the Australian dollar, the Kiwi dollar and the Canadian dollar. All three have more or less the same interest rate (CAD 1.75%, NZD 1.75%, AUD 1.5%), Canada having raised interest rates only 2 weeks ago and this week both the Reserve Bank of Australia and the Reserve bank of New Zealand announce their interest rate decisions. My view is that The Bank of Canada should not have raised rates, as economic data did not merit a hike. Conversely, I believe Australia should raise interest rates, although RBA governor Lowe seems reluctant to do so. (Last week Australian Export prices and the September Trade balance spectacularly beat expectations). New Zealand, in my mind has the correct borrowing rate for the time being. The Canadian dollar has indeed weakened since the BOC interest rate announcement and the Australian dollar got a boost from last week’s economic data. I remain bullish AUDCAD and AUDNZD.
In the US, the FOMC also meets on Thursday to announce its interest rate decision. With all the excitement and uncertainty of the Mid-terms, it is unlikely that the Fed will want to rattle the markets with an unexpected hike. US data though is still surprisingly good, as evidenced by job creation and average earnings. The US ten-year bond yield crept back up to above 3.2 % last Friday after Non-farm payrolls beat expectations with a print of +250,000. Analysts predict that the Fed will raise again in December. Also, this week, ISM services on Monday is expected to read 59.5 and the University of Michigan Consumer Sentiment Survey on Friday is expected to read 98. Watch out on Friday for US Producer Prices expected at 2.7%% (Y.o.Y) for October.
The British Pound rallied last week as the likelihood of a Brexit deal becomes more of a reality. UK 3Q GDP is released on Friday morning expected at 1.5%.
On the geo-political front, expect Mr. Trump to be belligerent towards China, Mexico and Iran. He has drawn much rancor from the creators of “Game of Thrones” and others for his “Sanctions are coming” Tweet. Barbed wire and military re-enforcements to the Mexican border are all part of his political theatre. As too, is threatening additional trade tariffs against China. As I have mentioned before, America can only be “great again” if it participates in World Trade and dialogue. Otherwise the US becomes protectionist and increasingly isolated. Let’s see what Tuesday’s elections bring!
Good luck and good trading. Watch out for me on video on Tuesday and Friday.
This Article was prepared and accomplished by Mr. Ben Robson in his personal capacity. The opinions expressed in this article are Ben’s own and do not reflect the view of EGM Securities.