- Rates: Split US Congress can’t surprise/inspire markets
US yields trade slightly lower overnight as Democrats retake the House as widely anticipated, resulting in a split Congress which might hamper the implementation of fiscal stimulus. We don’t expect a lasting market impact. Today’s eco calendar is empty with investors looking forward to tomorrow’s FOMC meeting. - Currencies: Dollar losing slightly ground post elections
The dollar extends recent correction as the results of the mid-term election are filtering through. A split Congress probably will make aggressive fiscal stimulus less easy. This might weigh on the USD short-term. However, the dollar might soon find a bottom again if the Fed maintains its assessment on the US economy.
The Sunrise Headlines
- US stock markets gained ground yesterday (+/-0.65%) ahead of the midterm elections. Asian equities are trading mixed after Japan and China paired early gains and are currently trading with losses.
- The US midterm elections played out as expected. The Democrats take back control of the House of Representatives while the Republicans strengthen their majority in the Senate. Markets had widely anticipated a ‘split Congress’.
- Moody’s, the credit ratings agency, has said the global picture for ratings is still stable overall, but flagged problems of slowing world growth, political risks, high debt levels and overheating markets.
- Spain’s Supreme Court rebuked its own earlier ruling calling on Spanish lenders to pay fees on mortgages which they had been passing on their clients for years. Spanish banks thus avert huge tax bills.
- The meeting between US Secretary of State Mike Pompeo and North Korean officials that was set for this Thursday in New York has been postponed for unknown reasons and to a later but unspecified date.
- New Zealand published a stronger than expected labour report with the unemployment rate dropping to 3.9% in Q3 from 4.4% the period before. The New Zealand dollar, or kiwi, gained on the news. NZD/USD trades now at 0.675.
- Today’s economic calendar is very thin with second-tier economic data with EMU retail sales. German industrials production rose by 0.2% M/M (0% forecast) in September. The US and Germany tap the market
Currencies: Dollar Losing Slightly Ground Post Elections
USD losing modest ground after mid-terms
Investors avoided big directional bets on Tuesday, counting down to the outcome of the US elections. In technical trade, the dollar initially lost of few ticks, but in the end daily changes were very small. EUR/USD closed at 1.1427. USD/JPY slightly outperformed and closed at 113.43. As expected, the US midterms will probably result in in split Congress with the Democrats regaining the House, but the conservative party extending its majority in the House. With this outcome, president Trump will probably have to be more selective in using fiscal stimulus to support the economy. Asian equities and US equity futures opened stronger, but gains are evaporating as trading continues. The outcome probably doesn’t change the US-China trade rift in a profound way. The dollar showed some nervous swings as the first results came in. At the moment for writing, the trade-weighted dollar drops to the 96 area. USD/JPY reversed an earlier spike higher, trading in the 113.25 area. EUR/USD gains a few ticks (1.1450 area). The yuan opened weaker but also regained some ground. Later today, the eco calendar is thin with few US data. EMU retail sales are a bit outdated. Markets will ponder the potential implications of the new balance of power in Congress. President Trump being forced to turn more selective in its fiscal stimulus might be a (temporary) negative for the dollar. However, the election result probably won’t change the Fed’s assessment in a profound way. We started the week with a neutral bias on EUR/USD. Last week’s rejected test of the 1.13 area/2018 low suggests that the USD rebound lost momentum. Some further USD losses after the election are possible. EUR/USD might regain some further ground in the 1.13/1.16 range, but we don’t expect a sustained, significant break higher. An unchanged Fed assessment later this week might already help to put a floor for the dollar. We assume the 1.1621 range top will hold.
Sterling rebounded recently as markets saw growing signs that a brexit deal/compromise is coming closer. Yesterday, the rally slowed as it appeared that there was a lot of work to do for PM May to convince her cabinet/party. Still, EUR/GBP closed the session at 0.8722, within reach of recent lows. Today, the Brexit debate might continue. For now markets are convinced that chances on a deal (and approval in the UK) are rising. In this context, sterling might remain well bid. EUR/GBP is nearing a first important support area (0.8723/0.8681/0.8621)
EUR/GBP: sterling testing first resistance on Brexit hope
