Morning Commentary: The Calm Before the Storm

Foreign Exchange - Morning Commentary

The Calm Before the Storm

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets are in a holding pattern as they await the outcome of the U.S. elections. Conventional wisdom and history indicate that the party that is out of power usually makes solid gains in non-Presidential election years.  The Democrats are poised to certainly do that in the House of Representatives. What is unclear is how much progress Democrats will make in the Senate and in 36 elections for governor.
Conventional wisdom, history, and polling got 2016 all wrong with a populist uprising shocking the pundits and markets regarding the Brexit vote and Donald Trump’s election. That was soon followed by numerous other populist rebellions in Europe, Australia, New Zealand and elsewhere. How much angst and anxiety remains from 2016 combined with how much voter dissatisfaction with the unconventional and unorthodox style and tactics of President Trump is what is unknown.
On election night two years ago, markets whipsawed from extreme pessimism to overt optimism regarding the economy as early returns showed President Trump outperforming. U.S. equities fell by nearly 4% in the early evening before marching higher and carrying U.S. interest rates along with it to much higher levels. We do not anticipate such outsized moves tonight but any decisive election outcome tonight will move the markets once again. Plan your trades and trade your plans!
  • The Reserve Bank of Australia (RBA) kept interest rates unchanged at 1.50% for the 25th consecutive meeting going back to August 3, 2016. In a quiet market, the Aussie dollar (AUD) is outperforming as the RBA stated that the economy was “performing well” and predicted growth will average 3.5% in 2018 and 2019. The probability of a rate hike does not reach 35% until August of 2019 so while the RBA is more upbeat, the market is not pricing in any immediate changes to monetary policy.
  • Germany reported stronger than expected factory orders for September, rising by 0.3% against expectations of a decline of 0.5%. However, factory orders YoY declined by 2.2%, including four straight months of declines. German interest rates are flat and the euro traded in a narrow range and is near unchanged from last night.
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