Making Sense of the US Midterm Elections
|On November 8th 2016, the US political intelligentsia was flattened when Republican Donald Trump soundly defeated the heavily favoured Democratic candidate, Hillary Clinton.
Every day since Mr Trump was sworn into office in January 2017, the defeated Democrats have focused on how to exact revenge and win back power in the Congress in this week's midterm elections.
Over the last two years, we have learned that goal of the Democratic leadership was not just gain a majority to block Mr Trump's political agenda, but rather to win enough seats to have Mr Trump impeached and removed from office.
Considering that since Mr Trump moved into the White House the SP500 is up over 28% and US unemployment is at a 40-year low, the Democrat's vitriol clearly stems from their disdain for the man and not from the results of his policies.
Now that the dust has settled and almost all of the votes have been counted, it looks like the Democrats will have a slight majority in the 435 seat House of Representatives (HoR), while the Republicans have extended their majority in the 100 seat Senate.
The knee-jerk market response to the Democrats gaining a majority in the HoR was to send the USD lower and Wall Street higher. In our view, the notion that the Democrat's control of the HoR will foster material economic change is a partisan position, not an analytical one.
We've been surprised by the number of financial commentators talking about the market implications of a political event which was almost perfectly in line with consensus and has happened every time in the past 18 Midterms after a new President enters the White House.
In short, we don't expect the Democrat's majority in the HoR to have any impact on Trade tariffs, Tax legislation, and most importantly, the trajectory of the Fed's interest rate policy. On balance, we consider the recent correction in the USD Index as an opportunity for Forex Traders to increase their long USD exposure at better levels.
Our suggestion to sell EUR/USD at 1.1445 was filled, which lowers our average short position to 1.1560.
AUD/USD
As was universally expected, the RBA held the benchmark overnight lending rate at 1.50%. Governor Lowe's upbeat assessment of the Aussie labour market, combined with a softer opinion on falling housing prices, has kept the AUD/USD above the 30-day moving average for the last six trading sessions. The last time that happened was back in Mid-June.
Despite the technical bounce higher, we still expect the weight of the Interest rate differentials to drive the pair lower.
Our short position in the USD/JPY from 112.70 was stopped out at 113.70.
GBP/USD
In the process of rising to a three-week high of 1.3190, the GBP/USD took out our short position from 1.3015 at 1.3090. We still believe the path of least resistance for the Sterling is lower.
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