Daily Brief – Midterm Madness

Midterm Madness

The dust has not yet settled from the US mid-terms, but the picture is still very clear. US voters turned Congress blue, leaving the Democrats in control of the House of Representatives and the Senate. The markets responded to this result with a risk-off move with one key exception: the Dollar did not exhibit its usual defensive bid. There are two reasons behind that: firstly, the Dollar itself was at the epicentre of the storm meaning that it was unlikely to be the candidate to provide a safe harbour. Secondly, with the passing of the risk event US yields dropped lower, stunting the appeal of the Dollar.

The Yen gained circa 0.6% against the Dollar as it became evident of the flavour of the mid-terms. Given the risk-off move, emerging markets also struggled to make progress in the vacuum left behind by the Dollar. There were some exceptions to this including the South African Rand which benefitted heavily later in the session from falling energy costs. Brent crude fell circa 10%, settling under $100pbl into the close.

You might think this would have caused a headwind for those currencies that exhibit a positive correlation with energy prices, namely NOK and CAD. Within the Norwegian Krone, the relationship held firm with NOK selling off as energy prices fell. However, the Canadian Dollar defied gravity, gaining in the session. The logic is endogenous to the reason oil prices fell in the first place. Traders pared back the expectation of further military action against Iran speculating that it was a contributing factor behind the Republican’s (read Trump’s) failures at the ballot box. The conclusion is that the President may now be less likely to repeat such ‘mistakes’ and, in any case, find it harder to find approval for them should he still be inclined to do so. The trade war with Canada was also a part of Trump’s agenda so the inverse correlation on this occasion is explained by the same feature: could we see a more moderate Trump?

Discussion and Analysis by Charles Porter

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