Dollar’s Rivals Gain as US Congress Split Flags Political Noise; RBNZ Rate Decision Awaited

Here are the latest developments in global markets:

• FOREX: As was widely anticipated, Democrats took control of the House and Republicans retained the majority in the Senate in the mid-term US elections. The dollar index opened with a gap down on Wednesday, slipping to a 2-month trough of 95.67 before inching up to 95.81 (-0.52%). Dollar/yen edged lower by 0.20% to 113.19 along with US Treasury yields after hitting a fresh 1-month high at 113.81 earlier in the day. The 10-year government notes jumped to 3.25%, the highest since October 9 but they soon returned to 3.18%. The British pound continued to benefit on growing hopes that a Brexit agreement could be reached at the end of this month. Pound/dollar rallied by 0.50%, euro/pound added 0.09% to its performance and pound/yen improved by 0.15%. Slightly better-than-expected retail sales growth out of the Eurozone helped euro/dollar to continue its recovery, while a weaker dollar was also supportive. In Italy, the government avoided a political headache after the Parliament approved as expected the security bill which had brought conflicts between the rulling partners. Euro/dollar advanced by 0.60% towards the 1.1500 level. The kiwi surged on New Zealand’s robust employment data, with traders now fixing their gaze to the RBNZ policy decision tonight. Kiwi/dollar jumped by 0.67% to a 3-month peak of 0.6788 and is set to complete the fifth consecutive green day. Aussie/dollar moved higher by an equivalent percentage to touch six-week highs just shy of 0.7300. Dollar/loonie retreated by 0.37% to 1.3074. Emerging currencies were also overperforming the US dollar.
• STOCKS: Global stocks edged sharply higher after the US Congress became split; a theme already seen in previous elections.  European equities extended higher on Wednesday at 1100 GMT. The pan-European STOXX 600 and the blue-chip Euro STOXX 50 surged by 1.17% and 1.27% respectively, with all sectors being in the green. The British FTSE 100 was strongly up by 1.29%. The German DAX 30 climbed by 1.08%, the French CAC 40 increased by 1.45%, while the Italian FTSE MIB inched up by 0.52%. The Spanish IBEX 35 was the best performer jumping by 1.80%, with banks leading gains after the Spanish Supreme Court said that banks were not required to pay stamp taxes on mortgages. In Asia, most stocks closed positive, while futures tracking US indices such the S&P 500, Dow Jones and Nasdaq 100 were substantially up, pointing to a significant positive open.
• COMMODITIES: Oil prices rebounded on Wednesday from multi-month lows after a report that Russia and Saudi Arabia are discussing oil output cuts during next year. WTI crude bounced off eight-month troughs, gaining 1.32%, while the London-based Brent added 1.73% to its performance. In precious metals, silver jumped by 1.07% and gold advanced by 0.61% to $1,233.68/ounce.

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Day ahead: Political concerns rise in the US; RBNZ to stand pat on monetary policy 

The dollar will be closely watched during the rest of the day as the outcome of the US midterm elections signalled a fresh wave of political uncertainty, sending the dollar lower. Although the Democrats’ victory in the House of Representatives was widely expected, investors focused on the negative implications the results might have as the opposition party is obviously not in favour of the US’s President’s fiscal agenda. Specifically, given that Republicans have now lost full control of Congress, Democrats could easily oppose Trump’s plans for further tax cuts and stricter migration controls in coming months, potentially bringing further selling to the greenback. Controversies around trade could also arise, turning the cloud around the US-Sino standoff even darker. Yet potential improvements in economic data and hence the Fed’s increasing willingness to deliver additional rate hikes in the future, might prevent investors from shifting funds away from the US.

Meanwhile in the UK, the sentiment around Brexit is not so negative following several positive headlines supporting that a Brexit deal could be possible . On Tuesday, the Cabinet meeting broke up without any agreement, though a “thumbs up” hand sign from the British Brexit Secretary boosted optimism that efforts to arrange an agreement were constructive. Moreover, Bloomberg’s analysts supported that a second meeting could be called within days to achieve an approval of the draft Brexit deal.

On the monetary front, the Reserve Bank of New Zealand is overwhelmingly projected to keep interest rates steady at a record low of 1.75% today at 2000 GMT. An upbeat employment report in combination with stronger inflation and GDP growth figures could turn policymakers less dovish, with investors waiting eagerly to see whether the RBNZ could play down chances for a rate cut. Note that in previous gatherings the Bank argued that interest rates could move either up or down. A press conference will follow the rate statement at 2100 GMT. Should policymakers appear more optimistic on the economy and hence on the rate path, the kiwi could experience stronger buying interest.

In Canada, Ivey PMIs will come out at 1500 GMT, though as usual, the loonie might shrug off the data.

At 2350 GMT, Japan will release core machinery orders for the month of September, while at the same time the Bank of Japan will be issuing its summary of opinions, giving some insight on what was discussed at the last week’s policy meeting when policymakers kept rates steady without surprise. The latter could move the safe-haven yen.

In energy markets, the Energy Information Administration is scheduled to report on US oil inventories for the week ending November 3 at 1530 GMT. Projections are for a smaller build-up in crude stocks, while the decline in distillate and gasoline stocks is expected to slow down. Crude prices could extend losses if the numbers prove that stockpiles are continuing to build up.

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