The index of economic activity in US manufacturing and services sectors came at 60.3 points in October, beating the expectations of 59 points. In September, the indicator hit the local peak at 61.6 points showing that companies are facing a surplus of new orders, as well as a shortage in labor force. The leading nature of the data generated through surveys suggests that companies will likely increase output, as well as maintain high employment rates in November.
The dollar is trading in a narrow range against major opponents on Tuesday, as caution dominates the mood and risk appetite with the midterm elections in the US being held today. The American nation will decide whether they like the combination of huge tax cuts and the hostile trade policy of the current administration. The average market outlook assumes that Democrats will take control of the House of Representatives, and the Republicans will remain with the Congress.
Trump’s policy largely explains the strong dollar that we are seeing now, so the outcome of the elections will likely be interpreted by investors as follows: if the Republicans succeed in defending the House of Representatives, it will be a big bullish surprise for the dollar and it will have to shoot up; if the Democrats gain control of the House of Representatives, then the dollar will be traded in the red zone for a while.
The loss of control over the House of Representatives will make it difficult for Trump to carry out large-scale reforms, including the tax reform “for the middle class”, which may further increase the budget deficit by $2 trillion for 10 years. The confrontation with China may also lose some color, as supporters of liberal trade Democrats will not allow the increase of protectionism, for example, through the introduction of duties on all imports from China.
The European currency remains under pressure, as the EU’s appeals to add modesty to Italy’s budget expenditures for the next year did not bring results. The deadline for a deal is set for the next week, but the absence of leverage on populists allows us to expect that the decision will be either postponed or come at the expense of concessions from the EU. Unfortunately, European diplomats cannot object to the manipulation of EU membership by Italy, so they will probably be forced to accept their conditions.
The Australian Reserve Bank made the widely expected decision to keep the rate unchanged (1.5%). Most investors believe that the cost of borrowing will remain at 1.5% at least until the middle of 2019. AUD responded weakly to the decision and even strengthened slightly against the dollar. The RBA has no incentive to raise the rate now, as in the real estate market, a problem issue for the Central Bank, there has been some cooling, so the course to stimulus is likely to be maintained without any particular risks.
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