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US Midterm Elections – How Will it Affect FX?

Posted on: 05 November 2018 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

October was a great month for the US dollar but as we begin the final two months of the year, the greenback could be losing its mojo. 

It is too soon to call a top because there was only one day of significant dollar strength last week but that day, the dollar experienced its biggest one-day slide in more than a year against sterling, the Australian and New Zealand dollars. Typically these moves can have continuation especially as we are no longer seeing the consistently positive data surprises from the US. However, we refrain from arguing that the dollar has peaked because the pullback in stocks on Friday is a reflection of the shaky footing in equities and a sign that the recovery at the beginning of the week may not last. So while the outlook for the US economy may be changing, risk aversion could still fuel demand for US dollars. AUD and NZD were the best performers but after the reversal, on Friday the downtrend remains intact. Looking ahead, it is going to be a busy week with three central bank rate decisions and the US Midterm Elections on the calendar. FX traders should keep an eye on stocks because the appetite of equity investors will guide the demand for currencies. 

5 Day Return vs USD Oct 29-Nov 2, 2018


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Data Review

  • Change in NFPs 250k vs 200k Expected
  • Unemployment Rate 3.7% vs 3.7% Expected
  • Avg. Hourly Earnings 0.2% vs 0.3% Expected
  • Personal Income 0.2% vs 0.4% Expected
  • Personal Spending 0.4% vs 0.4% Expected
  • PCE Deflator 0.1% vs 0.1% Expected
  • PCE Core 0.2% vs 0.1% Expected
  • Consumer Confidence 137.9 vs 136 Expected
  • ADP Employment Change 227k vs 187k Expected
  • Chicago PMI 58.4 vs 60 Expected
  • Manufacturing PMI 55.7 vs 55.8 Expected
  • ISM Manufacturing 57.7 vs 59.0 Expected
  • Trade Balance $-54.0b vs -$53.6 Expected
  • Factory Orders 0.7% vs 0.5% Expected
  • Factory Orders Ex Trans. 0.4% vs 0.4% Prior
  • Durable Goods Orders 0.7% vs 0.8% Prior
  • Durables Ex. Trans. 0.0% vs 0.1% Prior

Data Preview

  • FOMC Rate Decision - Fed could be more cautious but in all likelihood, the statement will remain unchanged
  • ISM Non-Manufacturing Index - Potential for downside surprise given weaker ISM manufacturing but job growth was stronger
  • PPI Final Demand - Potential for upside surprise given a sharp rise in prices paid of US ISM manufacturing index
  • The University of Michigan Report - Potential for downside surprise as sentiment is likely to be hit by equity market volatility

Key Levels

  • Support 112.00
  • Resistance 114.00

The US dollar traded higher on the back of the nonfarm payrolls report but it was the confusion around US-China trade relations that caused the sell-off in equities and spillover to currencies. The main takeaway from the jobs report is that it is good enough for the Fed to raise interest rates in December. 250K jobs were created last month, which was more than the market’s 200K forecast but this improvement was offset by the downward revision in September and the slowdown in wage growth. Traders were disappointed to hear that despite President Trump’s tweet about a constructive conversation with President Xi, Chief Economic Advisor Kudlow is not optimistic about US-China relations because there hasn’t been any massive movement on trade and more importantly, they have not been asked to draft a China deal. What’s even more confusing is that after these comments, Trump said he thinks a deal with China could happen. At the end of the day while Trump and Xi could meet at the G20 meeting at the end of the month it remains to be seen whether anything substantial will come out of the meeting. As stocks resumed their slide, investors flocked into the safety of US dollars and if stocks continue to fall, the greenback will resume its rise. 

If Democrats Win House, Dollar Will Fall

There are two big events for the dollar next week – the midterm elections on Tuesday and the Federal Reserve’s monetary policy announcement on Thursday.  According to the latest opinion polls, the Democrats could take control of the House with the Republicans maintaining its majority in the Senate. However many races across the nation are very close, so the House could swing either way. Midterm elections typically do not have a significant impact on the markets but given the controversial policies of this Administration, this year’s election has become exceptionally important. We know that dollar bulls like the Republican-controlled Congress because it supports Trump’s policies.  So if we get a split Congress, with the Democrats controlling the House, there could be legislative gridlock that makes it difficult for policies such as the President’s middle-class tax cut to pass, which would be negative for the US dollar. If the Republicans retain the majority of both houses of Congress, the President will feel emboldened to continue with his policies and the uptrend that we’ve seen in greenback should remain intact. More specifically, if the Democrats win the House, USDJPY could drop to 112 and EURUSD could squeeze to 1.15 but if the Republicans control both, USDJPY could extend to 114 and EURUSD could slip below 1.13. With that in mind, don’t expect the midterm elections to have a long-term impact on the greenback as investors will move onto the Fed meeting and the outlook for monetary policy quickly. 

No Surprises Expected from the Fed

While the Federal Reserve is widely expected to leave interest rates unchanged and reiterate their plans to raise interest rates in December, the tone of the FOMC statement could be more cautious. We know from the Beige Book that the central bank is worried about trade uncertainties and since the last policy meeting in September there have been more setbacks that improvements in the US economy. As shown in the table below, there’s been weakness in consumer spending, inflation the housing market and manufacturing activity. Although the labour market remains strong and many districts report labour shortages, many companies had a cautious guidance this quarter so hiring demand could ease. With that in mind, this FOMC statement is not a significant one because it's right after a rate hike and there’s no press conference so not much will change so the dollar impact could be limited.

US Economy - Federal Reserve Meeting


Data Review

  • GE Unemployment Change -11k vs -12k Expected
  • GE Unemployment Claims Rate 5.1% vs 5.1% Expected
  • EZ Consumer Confidence -2.7 vs -2.7 Expected
  • EZ GDP 0.2% vs 0.3% Expected
  • GE CPI 0.2% vs 0.1% Expected
  • GE Retail Sales 0.1% vs 0.5% Expected
  • EZ Unemployment Rate 8.1% vs 8.1% Expected
  • EZ CPI Core (YoY) 1.1% vs 1.1% Expected
  • GE Manufacturing PMI 52.2 vs 52.3 Expected
  • EZ Manufacturing PMI 52.0 vs 52.1 Expected

Data Preview

  • GE and EZ Services and Composite PMIs - Revisions are difficult to predict but changes can be market moving
  • EZ PPI - Potential for upside surprise as weaker euro is driving inflationary pressures up
  • GE Industrial Production - Will update after factory orders. Manufacturing PMI dropped
  • EZ Retail Sales - Potential for downside surprise given weaker German retail sales
  • GE Trade and Current Account Balance - PMI manufacturing dropped. Will have to see how factory orders and industrial production fares

Key Levels

  • Support 1.1300
  • Resistance 1.1500

Will the ECB Introduce new TLTRO?

As for the euro, the currency saw little change over the past week. Stronger than expected German inflation and employment data were offset by weaker Eurozone Q3 GDP growth and sentiment. Not much has changed for the euro but on Friday, there were reports that the ECB could be considering a new round of targeted long-term refinancing operations (TLTROs) but it's not clear how true that is because there were also reports that they won’t make a decision on this matter at their next policy meeting in December. With no major market-moving reports on the Eurozone calendar next week, the euro will most likely take its cue from the market’s appetite for US dollars. Technically, the downtrend for EURUSD remains intact as long as the pair remains below 1.1460.  


Data Review

  • BoE Keeps Rates at 0.75% as Expected, Lays out Scenarios for Hike
  • Mortgage Approvals 65.269k vs 64.7k Expected
  • GfK Consumer Confidence -10 vs -10 Expected
  • BRC Shop Prices -0.2% vs -0.2% Prior
  • Nationwide House Prices 0.0% vs 0.2% Expected
  • Manufacturing PMI 51.1 vs 53 Expected

Data Preview

  • Services and Composite PMI - Potential for downside surprise given weaker PMI manufacturing index and confidence
  • Visible Trade Balance, Industrial Production, Manufacturing Production, GDP - Trade balance should be lower given weaker manufacturing PMI. For GDP, weaker retail sales are offset by stronger trade balance

Key Levels

  • Support 1.2800
  • Resistance 1.3200

BoE Talks Rate Hike Scenarios

Last week, the British pound experienced its strongest one day gain since April 2017 but instead of extending higher, GBPUSD ran into a brick wall at 1.30. The setback was due entirely to the recovery in the US dollar because British and Irish officials have signalled that a deal on the Irish border is near. This has been the greatest obstacle to an agreement and if it is truly overcome, it won’t be long before we have a full agreement. The Bank of England also voted 9-0 to leave interest rates unchanged and lowered its growth forecasts for the year but instead of falling, sterling soared as the central bank talked rate hikes. According to the summary of the report, the MPC felt that “Were the economy to continue to develop broadly in line with the November Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate.” Governor Carney said a Brexit deal could release pent-up investment demand but a no-deal Brexit could also lead to a major supply shock that could drive up inflation and interest rates. While many are sceptical, the fact that he is thinking about rate hikes in a deal and no-deal scenario underscores the BoE’s hawkishness. In the coming week, sterling traders look forward to the release of UK PMIs, the trade balance and Q3 GDP. Although GBPUSD could pull back some more, we think a bottom has been set at 1.2700 and look for the pair to trade back to 1.32 in the coming months. 


Data Review


  • AU Building Approvals 3.3% vs 3.8% Expected
  • AU CPI (QoQ) 0.4% vs 0.5% Expected
  • AU PMI Manufacturing 58.3 vs 59 Prior
  • AU Trade Balance 3017m vs 1700m Expected
  • AU PPI (QoQ) 0.8% vs 0.3% Prior
  • AU Retail Sales 0.2% vs 0.3% Expected
  • AU Retail Sales Ex. Inflation 0.2% vs 0.4% Expected
  • Chinese Non-Manufacturing PMI 53.9 vs 54.6 Expected
  • Chinese Manufacturing PMI 50.2 vs 50.6 Expected
  • Chinese Composite PMI 53.1 vs 54.1 Prior
  • Chinese Caixin PMI Manufacturing 50.1 vs 50 Expected

New Zealand

  • Building Permits -1.5% vs 7.8% Prior
  • Consumer Confidence -1.9% vs 0.0% Prior


  • Unemployment Rate 5.8% vs 5.9% Expected
  • Full-Time Employment Change 33.9k vs 20k Expected
  • Part Time Employment Change -22.6k vs -4.1k Expected
  • Net Change in Employment 11.2k vs 15.0k Expected
  • Unemployment Rate 5.8% vs 5.9% Expected
  • Full-Time Employment Change 33.9k vs 20k Expected
  • Part Time Employment Change -22.6k vs -4.1k Expected
  • Net Change in Employment 11.2k vs 15.0k Expected
  • GDP 0.1% vs 0.0% Expected
  • Manufacturing PMI 53.9 vs 54.8 Prior
  • International Merchandise Trade -0.42b vs 0.20b Expected

Data Preview


  • RBA Cash Rate Target - RBA will maintain neutral policy stance since data has been decent
  • AU Services PMI - Potential for downside surprise given lower PMI Manufacturing report
  • Chinese Trade Balance - Chinese data is hard to predict but very market moving, likely to be weaker

New Zealand

  • RBNZ Rate decision - RBNZ likely to reiterate potential improvement in growth
  • Q3 Employment - Potential for upside surprise due to a sharp rise in the employment component of manpower index


  • IVEY PMI - Potential for downside surprise given weaker employment growth

Key Levels

  • Support AUD .7100 NZD .6500 CAD 1.3000
  • Resistance AUD .7300 NZD .6700 CAD 1.3200

AU Domestic Resilience Will Ease RBA Concerns

The Australian and New Zealand dollars will also be in focus with Reserve Bank monetary policy announcements from both nations. We know that the RBA remains firm in their neutral policy stance – they believe that interest rates need to remain low to support the economy and see no reason to change that view in the near term. For the time being, the Australian economy continues to fend off Chinese weakness. Although not many jobs were created in September, the unemployment rate dropped to a 6-year low. Inflationary pressures eased slightly in Q3, but retail sales, business and consumer confidence improved. The services sector is picking up the slack for manufacturing and that’s been enough to keep the outlook stable. However, the RBA recognises that the weaker yuan and slowdown in the Chinese economy poses a significant risk for growth so there are no rate hikes on the radar. A neutral outlook by the RBA will have a nominal impact on AUDUSD. Instead, the market’s appetite for US dollars will be a greater driver for A$ flows. The currency is deeply oversold and last week’s squeeze is a sign of the power of short covering. If US stocks stabilise and risk appetite improves, AUDUSD will find its way back to 73 cents.

AU Economy - Changes Since Last BoE Meeting

RBNZ Could Reiterate Positive Outlook for the Economy

There have also been improvements in New Zealand’s economy. According to the table below, job ads, card spending, service sector activity and inflation are on the rise. Dairy prices continue to fall but the rest of the economy is doing better. The last time the RBNZ met they said they see early signs of core inflation rising and expect growth to pick up in the coming year. However, NZDUSD sold off because they highlighted the downside risks and the need for monetary policy to remain expansionary for a considerable period of time. We don’t expect much change to the policy statement this month but their optimism is reinforced by recent data, reducing the chance of easing. Like AUDUSD, NZDUSD is deeply oversold and any hint of RBNZ positivity could take the pair above resistance at 67 cents. Aside from the RBNZ rate decision, third quarter labour market numbers will also impact NZD trade along with Chinese trade data which could affect both AUD and NZD. Right now, technical indicators are still bearish but AUDUSD has support at 71 cents and NZDUSD at .6550. 

Reserve Bank of New Zealand (RBNZ) Rate Decision

Drop in Oil Prevents CAD from Rising
The uptrend in USDCAD remains intact after last week’s economic reports. Although GDP growth beat expectations, the trade balance failed to turn into surplus like economists had hoped and more importantly, job growth slowed last month. Only 11K jobs were created in October, down from 63K in September. Yet, the sell-off in the loonie was limited because the details of the labour market report were strong. Nearly 34K full-time jobs created, pushing the unemployment rate down to 5.8%. Unfortunately, the fact that the loonie cannot rally on this report and the Bank of Canada’s talk of more rate hikes last month tells us that risk appetite has a greater impact on the currency. Oil prices have also fallen sharply with the price of Western Canada Select dropping to its lowest level in 2.5 years. Investors are reluctant to buy CAD because they fear that these moves could slow BoC tightening.