Market Priorities Crystalized

The past two days of trading leave us with no doubt that the overwhelmingly dominant market driver at the moment is the US election. We explain why. The New Zealand dollar was the top performer while the US dollar lagged. Australian trade balance is due later. 2 NZD Premium trades were stopped out, 2 NZD trades remain in progress and the Dow30 trade was locked in at a 295-pip gain.11 Premium trades remain in progress.

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The FOMC statement was the talk of markets leading into the decision but the result was largely a dud. The US dollar rose around 25 pips across the board as the Fed tweaked inflation language to something slightly more hawkish.

The Fed removed references to inflation remaining low in the short term and noted that wages have moved up. Those looking for a clear nod to a December hike were left in suspense and that isn't a surprise. If the Fed had repeated last year's semi-promise to hike “at the next meeting,” then they would be stuck making a similar promise every time they planned to hike.

The closest they came to offering a nod to December was adding the word “some” to the line saying they're going “to wait for some further evidence” of economic progress before hiking. The implication is that they only need another month of economic data that isn't terrible and they will hike.

What's most important is the market reaction. It was minimal. In Fed funds, the probability of a December hike remained unchanged at 78%.

Instead, the market continued to focus on the US election. Despite a small bounce on the Fed, USD/JPY finished another 75 pips lower. The market's priority is clearly the election and that's the lens to filter news. When non-farm payrolls rolls around, it matters less whether it impacts Fed policy than the risk it impacts the White House.

In the short term, we struggle to see a scenario where the jitters we highlighted yesterday fade before election day. Instead, look for continued gains in the Swiss franc, yen and euro on an smidge of Trump-supportive news.

Looking abroad, the next release is the 0030 Australian trade balance report. It's expected to show a $1.7B deficit. At 0145 GMT, the Caixin China services PMI is out. The prior was 52.0.  Again, expect these releases to be quickly forgotten is politics dominates.