FX Markets Monthly Outlook – November 2018

The financial markets saw a frothy month in October despite lack of any clear fundamentals. The U.S. equity markets took a nosedive on concerns that the accelerated pace of inflation could speed up the Fed’s rate hike plans.

However, the inflation data ease which manages to contain the concerns. Meanwhile, data from the Eurozone did not see any significant changes. The Eurozone economy was seen to be chugging along at a moderate pace.

Data from China showed an uncertain picture. While consumer prices saw an increase, producer prices fell but the nation’s third-quarter GDP managed to remain within the authorities’ target rate. However, there are concerns that China’s economy could hit a slow patch in the coming months.

The market frothiness in the emerging markets was somewhat contained. Gold was the top performing asset in October as price action jumped 1.87% o the month. This was followed by the Japanese yen which was up a modest 0.69%. The gains in gold and yen indicate the market risk aversion during the month. The NOK was the weakest currency pair which lost 3.71% against the U.S. dollar.

The month ahead: November 2018

Economic data for November will see the U.S. mid-term elections as the most significant event early into the month. The election verdict will be a response to President Trump’s policies. Although Trump hasn’t delivered on all his election promises, the re-drafted NAFTA deal is something to boast about.

However, concerns remain on the U.S. trade policies, especially against China. Recently, China was seen to be mainly targeting the soybean market which was seen as a region that voted for Trump. A shift in the U.S. Congress could potentially keep Trump’s policies in check.

On the economic front, interest rates are expected to remain unchanged as the month ahead will focus on the first month of the fourth quarter of the year. Economic data will also cover the third quarter GDP reports amid other things.

Here’s a quick overview of some of the critical line up of events for the month ahead.

The U.S. mid-term elections

The U.S. goes to polls on November 6th for the mid-term elections. All 435 seats on the house and 35 seats from the Senate are up for re-election. History dictates the President’s party often fares poorly in the mid-terms.

Given that Trump is from the Republican party, the focus will be on how many seats the Democrats will win. A Democrat majority would make the U.S. Congress widely diverse which will make it difficult for President Trump to pass his ordinances. On the financial side, the markets could see some stability amid the chaos in case of a Democrat majority in the house.

The November 6 mid-term elections will also be a litmus test for President Trump and his policies. The results of the recent tariffs imposed on the major U.S. trading partners will most likely be felt in the next week. For the currency markets, expect to see some volatility. A surprise win by the Republicans could, of course, make the markets very frothy. Initial polls estimate that the Democrats are most likely to take a majority in the House, but as with recent polls, anything is possible.

RBNZ – Another non-event in the making

New Zealand’s Reserve Bank will be meeting this month. No major changes are expected from the central bank as the RBNZ’s official cash rate is expected to remain unchanged at 1.75%.

This comes despite some positive data from New Zealand. Recent data showed that New Zealand’s GDP advanced strongly alongside a strong inflation reading for the third quarter of the year. However, most of these gains in consumer prices came from higher fuel prices. Furthermore, the recently added surcharge on fuel prices is expected to keep inflation higher in the coming quarters.

For the RBNZ, the best policy guidance is no guidance, meaning that the RBNZ is expected to maintain a neutral tone as it continues to assess the economy.

Fed to stay on the sidelines

The FOMC will be holding its monetary policy meeting in early November. No changes are expected from the central bank given its recent rate hike in September. Still, investors would like to know the view of the policymakers heading into the last month of the year.

The Fed is expected to hike interest rates one more time this year in December. This would bring the Fed’s short-term fed funds rate to 2.25% – 2.50%. A consistent view of the economy could convince the markets of such a rate hike.

While the Fed has signaled the risks of the U.S. global policies, investors will be looking to see if anything has changed. Ahead of the Fed’s meeting, policymakers already have the recent economic data. In September, the Fed’s PCE price index was steady at 2.0% while the preliminary GDP data showed an increase of 3.5% during the third quarter of the year.