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Tuesday AM: GBP Eyes Cabinet Meeting | USD: Mid-Terms | NZD: Employment Data | AUD Muted on RBA

Exchange rates

Image © Andrey Popov, Adobe Stock

U.S. stocks markets put in a mixed performance at the start of the week with the Dow Jones and S&P 500 indices up 0.8% and 0.6%, respectively but technology stocks continue to bleed ensuring the Nasdaq lost ground.

Asian stock markets are mixed this morning.

The impact on foreign exchange markets has been understandably minimal with traders apparently keen to hold fire on any major directional moves until the results of the mid-term vote are made known.


GBP

GBP

For Sterling, the driving concern remains Brexit and on this matter we know Prime Minister Theresa May is meeting her Cabinet to update on current Brexit negotiations and push forward the internal debate on Brexit currently underway in her own party.

Cabinet meetings don't tend to deliver any official communiques so we will be unpicking the inevitable leaks and briefings that will be issued by the press.

As we have seen of late, Sterling is highly reactive to such reports and we stand at the ready for further Brexit developments through the day.


USD

USD

Americans will head for the ballots today to vote in the midterm elections. At present the Republicans controls both chambers of Congress.

The most probable election outcome is that the Democrats take control of the House of Representatives (70% probability) while the Republicans will maintain their majority in the Senate (80% probability).

"Tuesday’s mid-term elections will have a major say over where the dollar trades for the rest of the year," says Chris Turner, head of FX strategy at ING Group. "The Dollar hasn’t rallied this year purely on trade friction. The fiscal/monetary mix has had a big say in the dollar, and that’s why mid-terms are important."

However, most polls indicate the race has tightened a bit recently and markedly higher voter turnout than normal will create some additional uncertainty.

"The Republicans benefit from strong economic growth, low unemployment and several Trump trade policy 'wins' but normally the incumbent president’s party lose a substantial number of seats during the midterms," says Andreas Johnson, U.S. Economist with SEB.

Johnson believes a divided Congress would make it less likely major reforms can be implemented during the remainder of Trump’s term but this is unlikely to affect our forecasts much.

"We do not expect the midterms to have any major impact on financial markets. Markets largely discount a Democratic majority in the House but if the Republicans keep control of both chambers the USD might strengthen and equities rise," says Johnson.


NZD

NZD

The New Zealand Dollar is subject to a slew of important labour market numbers at 21:45 G.M.T.

The quarterly employment change is forecast to show growth of 0.5% for the third quarter, unchanged on the previous quarter.

The unemployment rate for the period is forecast to read at 4.4%, while the labour cost index is forecast to slow to 1.9% on an annualised basis in the third quarter.

This represents a slowdown from 2.1% in the previous quarter and hints at just why markets are not expecting an interest rate increase out of the Reserve Bank of New Zealand anytime soon.

The RBNZ will want signs of wage pressures, which in turn implies higher inflation down the road, before pulling the trigger on higher interest rates.

And only when markets believe the RBNZ is headed towards a cycle of interest rate rises do we believe the Kiwi will take off.

For now, the technical rebalancing of the market's exposure to the currency continues: the NZD has struggled through 2018 with markets engaged in a heavy one-way bet against the currency. But, during October we saw investors exit this bet which in turn saw the NZD rebalance higher.

Just how long this technical move persists will be important for the currency.


AUD

AUD

The Reserve Bank of Australia (RBA) kept the policy rate unchanged at 1.50% as widely expected.

The RBA revised GDP forecasts slightly higher but repeated the message that reducing unemployment and returning inflation to target will be a gradual process.

On the outlook for the labour market, the RBA remains upbeat expecting the unemployment rate to fall to around 4.25% in 2020.

The prior forecast was a fall to 5%.

"We are sticking to our forecast that the RBA will remain on hold until late 2019," says SEB's Johnson.

Janu Chan, Senior Economist with St.George Bank in Sydney says the downside risks to the growth outlook reflecting a downturn in the housing market and the potential negative impact on consumer spending suggests that a hike remains someway off.

"We continue to expect that the RBA will leave official interest rates on hold for some time," says Chan.


EUR

EUR

The final reading of the PMIs for October are published at 09:00 G.M.T., all are expected to stay unrevised from the first reading.

The composite is forecast to read at 52.7, services at 53.3.

"The Euro will come under pressure based on fundamental weakness, as the composite measures of PMI for the eurozone, due this morning, are likely reaffirm the slowdown in activity that has been prevalent throughout the region, magnifying fears of softer GDP growth," says Nema Ramkhelawan-Bhana, a foreign exchange strategist with RMB in Johannesburg.

Ramkhelawan-Bhana meanwhile warns a surprise Republican win in both chambers could embolden Trump to take stronger trade measures, spurring US Dollar strength and amplifying asset price volatility.

"This would certainly reinforce a downward trend on EUR/USD, which is teetering at 1.14. Even if the US mid-terms go to plan," says Ramkhelawan-Bhana.


CAD

CAD

The Canadian Dollar is treading water with markets understandably awaiting the outcome of today's mid-term elections before pushing the currency of the U.S.A's northern neighbour.

"USD/CAD continues to oscillate around the 1.3100 threshold ahead of today’s US mid-term elections. We stress that prices will have to close below support at 1.3070 in order to end the uptrend that has been in place since early October, with resistance located at 1.3170," says Sue Trinh, a foreign exchange strategist with RBC Capital Markets.