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08-NOV-2018, THURSDAY

1) Nikkei 225 May Follow S&P 500, JPY Price at Risk Post US Midterms
2) NZD/USD Correction to Face Dovish RBNZ Forward-Guidance
3) Krona and Euro Vulnerable to Unprecedented Political Gridlock

1) Nikkei 225 May Follow S&P 500, JPY Price at Risk Post US Midterms

The US Dollar trimmed losses in the aftermath of the 2018 US midterm election results during Wall Street trade as anticipated. The Democrats took control of the House of Representatives while the Republicans hung on to their majority in the Senate. This increases the chance that US President Donald Trump may revive hopes of an infrastructure spending plan which could cause the Fed to hike more aggressively. Indeed, US government bond yields rallied on Wednesday ahead of tomorrow’s Federal Reserve interest rate announcement. Meanwhile the S&P 500 and NASDAQ Composite gained about 2.12% and 2.64% respectively. This kind of trading dynamic was similar to what we saw after the outcome of the 2016 US presidential election where prospects of US tax cuts beefed up stocks and the US Dollar.

Thursday’s Asia Pacific trading session contains another speech from RBNZ’s Governor which the New Zealand Dollar will be closely watching. We will also get October’s Chinese trade statistics which could be at risk to downside surprises given slowing local growth and US tariffs. This could pressure sentiment-linked currencies such as the Australian Dollar lower and later, emerging markets.

Otherwise, we may see the Nikkei 225 and ASX 200 echo gains from Wall Street as market mood improves. This risks depreciating the Japanese Yen, which tends to weaken as traders use it as the funding currency in pursuit of carry trades. Meanwhile, the dominant downtrend in AUD/USD is at risk after the descending trend line from February gave way. Confirmation, via another daily close higher, may precede further gains.

2) NZD/USD Correction to Face Dovish RBNZ Forward-Guidance

The Reserve Bank of New Zealand (RBNZ) interest rate decision may curb the recent advance in NZD/USD as the central bank is widely expected to keep the official cash rate (OCR) at the record-low of 1.75% in November. It seems as though the RBNZ will stick to the current script at its last meeting for 2018 as officials pledge to ‘keep the OCR at an expansionary level for a considerable period,’ and Governor Adrian Orr & Co. may continue to strike a dovish forward-guidance in 2019 as ‘trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth.’

As a result, more of the same from the RBNZ may drag on the New Zealand dollar, but signs of strong job/wage growth may push the central bank to soften its dovish tone amid ‘early signs of core inflation rising towards the mid-point of the target.’ With that said, a material shift in monetary policy outlook may ultimately fuel the recent advance in NZD/USD as it boosts bets for an RBNZ rate-hike in 2019.

The Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) at the record-low of 1.75% in September and it seems as though the central bank is in no rush to alter the monetary policy outlook as officials ‘expect to keep the OCR at this level through 2019 and into 2020.’ It seems as though the RBNZ will keep the door open to further support the economy as ‘consumer price inflation remains below the 2 percent mid-point of our target,’ and the central bank may continue to strike a dovish tone next year ‘downside risks to the growth outlook remain.’ More of the same from the RBNZ sparked a mixed reaction in the New Zealand dollar, with NZD/USD quickly pulling back from the 0.6680 region to close the day at 0.6611.

3) Krona and Euro Vulnerable to Unprecedented Political Gridlock

Political gridlock has gripped Sweden since the inconclusive elections on September 9th that resulted in a hung parliament. The rise of the Sweden Democrats (SD) – a nationalist group with origins in neo-Nazism – has greatly complicated coalition-building negotiations. All the big parties and coalitions – such as the Red-Greens and The Alliance – have refused to cooperate with the Sweden Democrats on principle. Any party seen publicly working with the nationalists risks hurting its credibility, providing ammunition for critics to allege sympathy with the extreme right wing.

So far, the speaker of the house has picked two candidates to form a government to lead Sweden. Both have failed. Moderate Party leader Ulf Kristersson was initially asked, and was then followed by Stefan Lofven, the current prime minister of the caretaker government. Kristersson has been asked once again to form a government. However, the outlook appears unnerving. If he and the next candidate fail, it will trigger another election, to be held in three months. Another poll is likely to yield a similar outcome, only with the possibility that the Sweden Democrats expand their support base. A pickup in European market volatility amid worries about growing political instability in the region will probably follow.

The fracturing of parliaments and rise of nationalism has been a growing characteristic of European politics. The macroeconomic implications of political fragmentation – especially from nationalists – will negatively affect EU stability and undermine the Euro, as it has in Italy. Adding to the pressure, Sweden’s parliament has to approve a budget for 2019 by November 15th. Under normal circumstances, a government would have already been formed by this time. Absent that, there are measures to put forward a “neutral” budget by the current care-taker government.

However, it is somewhat difficult to imagine such thing as a “neutral” budget. The allocation of resources by the state is predicated on the values and objectives of the dominant party in the government. To that end, the Moderate Party is contemplating pushing forward its own version of a “neutral” budget to counter whatever Mr Lofven and company come up with.

The growing pressure from the impeding deadline may push political parties to radically shift their positions. While all major parties have refused to cooperate with the SD’s, their refusal to work with each other has undermined progress. Compromise is necessary, but with whom and when is unclear. That is understandably a cause of concern for markets and may inspire an exodus from SEK- and (to some extent) from EUR-denominated assets.

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