Xe Morning Update - Your daily market wrap

Developments in markets for Monday 10 November......

• Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??US dollar??
• AUD/USD:??top G10 performer, ratchets through 0.65 to trade 0.6540 highs
• U.S. govt shutdown set to end this week as DEMs cross the floor on initial vote
• Risk sensitive assets take flight: Nasdaq propelled close to 2%, AUD outperforms
• Key data, including CPI unlikely to resume this week given data collection paused
• Day ahead: RBZN inflation expectations; UK jobs data….BoE expected to cut in DEC.

Each morning we bring you up to speed with the latest market news, including the events and themes that are impacting currencies and other related asset classes......

Risk assets have commenced the new week on positive footing, aided by news over the weekend that Senate and House Republicans and Democrats are open to taking steps to end the longest U.S. government shutdown on record. A group of eight moderate Democrats broke party ranks on Sunday evening, voting in favour of a bill that would end the shutdown. Bloomberg reports under the agreement Congress would pass full-year funding for multiple departments, providing pay for furloughed government workers and recall agency workers who were laid off. A deal is still several days off - the Senate set to resume deliberations before President Trump must sign the legislation into law.
 
It appears that with Thanksgiving approaching later in the month, the prospect of widespread flight delays spurred lawmakers into action. The next 48-hours should confirm if the Democrats compromise leads to new legislation.
 
The market's mood was buoyed by the news, U.S. equity market futures bid through Asian trade, as were risk sensitive currencies. Logging Friday's lows a few pips south of 0.6470, the Australian dollar commenced the new week in the 0.6490's, extending its ascent into the London morning, peaking just shy of 0.6540. Gains were pared through the New York morning, AUD/USD handing c. 25-pips before catching a bid to ascend back towards 0.6540.
 
AUD bears have been in total control over the past two weeks, initiating a sell-off that commenced off the 29 October swing high located a coupe of pips below 0.6620. Through an 8-day trading span, AUD/USD retreated close to 2.5%, the primary catalyst being the Fed's hawkish 25-bps cut - the Federal Open Market Committee (FOMC) delivered as expected, but Chair Powell surprised with his hawkish rhetoric, explicitly dismissing a December cut as a done deal.
 
Concerns over the sustainability of rich valuations within megacap tech stocks has also been a factor, deteriorating sentiment leading to a modest pullback in the three major U.S. equity indices that were seemingly ascending to new all-time highs every other day over the past couple of months. From Friday's lows, the tech heavy Nasdaq is up around three-and-a-half percent, the S&P500 over 2%. Procyclical currencies, such as the Australian and New Zealand dollars traditionally benefit during periods of equity market strength.
 
Seasonally, November is the strongest month for U.S. equity markets, the S&P500 rising 60% of the time in records dating back to 1929.
 
Will the seasonal trends continue this November?
 
The answer likely lies in the resumption of data produced by U.S. government agencies.

US equity markets as at time of morning update release and may not represent session closing prices  

CPI data for October was scheduled to be released this Thursday, but will not, even if the shutdown officially ends over the next 48-hours. The U.S. Bureau of Labor Statistics which prepares and releases CPI and other critical data points, including nonfarm payrolls (NFP) halted in-person data collection and will therefore likely forgo issuing the October CPI report altogether. Two monthly job reports (which include NFP) have also been shelved during the shutdown, creating a data vacuum for the Fed and the market, the former flying blind into the final FOMC meeting for the year.
 
During the FOMC presser on 29 October, Powell used the analogy of a requirement to slow down when driving in fog thereby implying the committee may opt to remain on-hold at the conclusion of the 09-10 December FOMC meeting. Rates markets currently assign a circa two-thirds implied probability to the target rate being lowered by a quarter point to 3.50-3.75%, down from close to 90% prior to the October FOMC.
 
The FOMC is currently experiencing significant division as it grapples with the conflicting goals of achieving full employment and maintaining price stability. The committee faces the dual challenge of addressing rising inflation while also being concerned about a persistently weak labor market. December's decision must be made without recent jobs reports nor CPI, meaning the committee is relying on dated September data and questionable, shorter-term unofficial data. 
 
The risk of a policy misstep is heightened.
 
To the day ahead, the day's major regional data release presents via the RBNZ's Inflation Expectations for the December quarter. For the prior quarter, 2-year ahead inflation expectations printed at 2.28%, conformably within the 2-3% target band. The outcome of the survey will not alter the near-term path for the OCR, the RBNZ to deliver another 25-bps cut at the final meeting for the year which concludes 26 November.
 
The Aussie continues its impressive ascent versus the Kiwi, AUD/NZD marking fresh 12-year highs at 1.1590 through Monday's sessions. Attention turns to 1.1660 which acted as key resistance in September 2013.
 
UK jobs numbers are also released - the unemployment rate projected to tick up from 4.8% to 4.9% whilst wages growth is expected to mildly moderate. The final BoE meeting for the year is held on 18 December - the expected outcome a quarter point cut to lower the bank rate to 3.75%. Pulling back from the 0.5000 mark in late October, AUD/GBP appears to be rebuilding momentum to again test the key psychological level, Monday's highs marked a couple of pips above 0.4960 having bottomed out near 0.4920 through Friday's trade.
 
As for the Australian dollar, the 100-day moving average, located around 0.6540 presents as the near-term critical hurdle to clear. Price action ascending above the widely observed trend following indicator with conviction opens a path for AUD/USD to re-test the 29 October swing high, located just south of 0.6620.
 
Have a good day.
Stuart Talman (stuart.talman@xe.com)
Xe Corporate

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