Week Ahead
 | 05/11/2018

November 5th to 9th | US Midterm elections and central banks to draw the market’s attention

As the new week enters, new hopes regarding the Brexit negotiations seem to be on the table, while GBP traders will be having an eye out for the release of UK Services PMI for October and especially the GDP growth rate for Q3. Across the Atlantic, the mid-term elections and the US-Sino trade relationships maybe opening new chapters. Market focus could also be on FOMC’s interest rate decision for further direction for the USD. China’s trade balance figure for October is due out and could rattle the market as the figure seems to defy the US tariffs once again. RBA’s interest rate decision may not pass unnoticed this time and RBNZ’s interest rate decision could move the Kiwi.

US midterm elections and US-Sino relationships, along with the FOMC interest rate decision in focus.

The main political issue for the US this week would be the mid-term elections. The elections are to affect the House of Representatives (all seats, 435) and the Senate (35 seats out of total of 100). Should the Democrats gain majority in either of the two houses, Trump’s power could be curtailed significantly, as he may have to compromise each step of the way. The issue gets more intense should the existing slim Republican majority (2 seats) in the Senate be overturned, as the Senate would be able to instigate probes against President Trump on various issues. On the other hand the US-Sino trade relationships could start softening, as the idea of a deal was floated by US president Trump last week and his Chinese counterpart seems quite receptive. Such a development could undermine the USD’s position as a safe haven and ultimately weaken it. Also a forecasted widening Chinese trade surplus (due out on Thursday), could imply that the US tariffs had little effect on Chinese exports. Contrary to that, would be a possible hawkish view of the FOMC on Thursday, when its interest rate decision is due out. The US employment report for October on Friday showed the picture of a rather tight labour market, which could support arguments for a more hawkish positioning of the FOMC in the accompanying statement, as the Fed’s Funds Futures imply currently a high probability (93.0%) for the bank to remain on hold at a median of 2.125%. Overall, the US economy’s financials also seem to support such a more hawkish stance by the FED.

GBP- Hopes for Brexit and GDP growth rate could continue to support the pound

Last week, the pound rallied on Thursday marking one of its highest gains in a day for 2018. The reasons behind the rally were Brexit based and increased hopes for an orderly Brexit were created. The Sunday Times, reported that an all-UK customs deal is in the works between the UK and the EU. The report stated that UK PM Theresa May secured concessions from the EU to keep all of UK territories in a customs union, hence avoiding a hard border in Northern Ireland. Also media reported that the UK was able to secure (privileged?) access to the European market, driving the pound even higher. But it’s not only the fundamentals behind the pound. The GDP growth rate due out near the end of the week is also forecasted to accelerate (forecast: +0.6% qoq vs. +0.4% qoq) for Q3. Should UK’s GDP growth rate accelerate also on a year on year basis as forecasted (forecast: +1.5% yoy vs. +1.3% yoy), it would provide some comfort for one of the biggest worries regarding the UK economy at the moment, also supporting the pound despite a possible drop of the Service sector PMI for October (forecast:53.3 vs prior: 53.9).

EUR- Financial data releases and Eurogroup for the EUR

A number of financial releases could be setting the tone for the common currency this week. Starting on Tuesday with Germany’s industrial orders growth rate projected deceleration for September (forecast:-0.6% mom vs. prior: +2.0% mom) which could weaken the EUR somewhat and continuing on Wednesday with the forecasted acceleration of Germany’s industrial output f growth rate for September (forecast: +0.0%mom vs. prior: -0.3%mom) and Eurozone’s retail sales growth rate (forecast: +0.1%mom vs. prior: -0.2% mom) for September, which could support the single currency. The final releases of the PMI’s for October are expected to remain unchanged confirming the preliminary lukewarm to weaker results and could set a bearish tone for the Euro, albeit the market’s reaction may be somewhat muted as they are the final results. On the fundamental side, the Italian budget issue could resurface as on Monday a Eurogroup meeting will take place and further announcements could be made. As possible sanctions continue to loom over Italy, the common currency may prove sensitive to the issue. On the contrary, the Euro could get support from any positive developments regarding Brexit.

AUD-NZD Central Bank interest rate decisions to be the main events.

On Tuesday, during the Asian session we get RBA’s interest rate decision which is widely expected to remain on hold. Currently AUD OIS imply a probability of 99.67% for the bank to remain on hold at +1.50%. Should the bank remain on hold as forecasted, we could see the market’s attention turning to the accompanying statement. The recent deceleration of the inflation rate (Q3: +1.9% yoy vs. Q2:2.1% yoy) would signal the drop below the bank’s target range for inflation between +2.00% yoy and +3.00% yoy and could suggest a more dovish tone. The same applies for the deceleration of the retail sales growth rate (September: +0.2% mom vs. August: +0.3% mom) which could imply a weakening of inflationary pressures in the Australian economy. On the other hand, the recent drop of the unemployment rate (September: 5.0% vs. August: 5.3%) as well as a possible softening of the US-Sino trade relationships could provide grounds for optimism. Overall, we see the growth rate forecast to remain unchanged at “a bit above 3%”, however we retain our worries about direct and indirect indicators for inflation.

Moving on eastwards, New Zealand’s RBNZ is to announce its own interest rate decision on Wednesday. The bank is widely expected to remain on hold and currently NZD OIS imply a probability of 98.43%, for the bank to maintain the cash rate at +1.75%. With inflation rate accelerating (Q3: +1.9% yoy vs. Q2: +1.5% yoy) substantially for Q3, the next question mark would be the unemployment rate. The rate is due out for Q3 on Tuesday, one day ahead of the release of the bank’s interest rate decision and is forecasted to remain unchanged at 4.5%, which is considered as rather low for New Zealand’s economy and if the forecast is realized we could see the Kiwi strengthening ahead of the bank’s decision. It should be noted that a possible deceleration of the labour cost growth rate (forecast: +1.9% yoy vs. prior: +2.1% yoy) could blur the picture of a rather tight labor market, somewhat. Hence some hawkish elements may be escaping out of the accompanying statement.