• Blue wave. Large swing for Democrats in US mid-terms. Set to control House & Senate. US equities rose. Bond yields, oil prices, & USD declined.
• AUD rebounds. Weaker USD & positive risk sentiment boosted the AUD. Push-pull forces point to more volatility. Softer USD offset by slower AU economy.
Global Trends
The US mid-term election results were in the market driver’s seat overnight, with the sweep of Congress by the Democrats exceeding even bullish pre-vote predictions. The Democrats look to have secured control of both the House and the Senate with strong majorities. There are several push/pull forces to consider going forward. A takeover of Congress by the Democrats may constrain President Trump’s legislative agenda over the next 2 years. For example, a Democratic Senate could reduce President Trump’s ability to appoint loyalists to Federal Reserve vacancies or other appointments. And while President Trump retains authority over trade, immigration and foreign policy, the Democratic sweep reduces the odds of further large-scale fiscal spending and raises the chances of investigations or budget confrontations. At the same time, the swing to the Democrats might also create political headwinds for AI investment as opposition to data centre construction was a key issue in a few states. AI CAPEX has been a key source of growth for the US economy over the past couple of years.
In terms of the numbers, US equities rose sharply overnight (S&P500 +1.6%, NASDAQ +1.4%) with short-term focused participants seemingly taking a view that with the mid-term elections now out of the way some uncertainty has been removed. Also helping the mood was the large fall in oil prices , and resultant drop in bond yields. Brent crude tumbled ~9% (now ~US$95.25/brl) on the back of perceptions the US election results could potentially generate a change in Iran strategy. President Trump told the FT he has no immediate plans to launch strikes on Iran, while VP Vance stated that “the reason we lost is the war”. Time will tell if the loss softens or hardens President Trump’s stance on the conflict. US bond yields declined ~4-7bps across the curve with the pullback in oil prices creating a disinflationary impulse. In FX, the USD lost ground due to the dip in yields and oil prices (recall, the USD has become positively correlated to oil since the US morphed into a ‘net energy exporter’). EUR rose (now ~$1.1230), as did GBP (now ~$1.3472), and USD/JPY eased (now ~158.46). The NZD perked up a little (now ~$0.5623), and the backdrop helped the AUD outperform over the past 24hrs (now ~$0.7008).
Looking ahead, the Bank of England meets tonight (11pm AEDT) and is expected to hike rates for the first time this cycle (+25bps to 4%). Beyond that the US jobs report is the major macro event at the end of the week (Friday night AEDT). We think the robust underlying pulse of the US economy might see the US jobs report come in stronger than consensus forecasts. If realised, this could see the USD bounce back a bit, however, given the shifting US political landscape, drop in oil prices, and shifting interest rate spreads we don’t think this type of move should last too long or extend too far.
Trans-Tasman Zone
Global dynamics and a softer USD stemming from the Democrat sweep in US mid-term elections supported the NZD and AUD overnight (see above). That said, at ~$0.5623 the NZD remains near the lower end of its 1-year range with yesterday’s subpar NZ jobs data, paring back of near-term RBNZ rate hike expectations (now a ~58% chance of a December move), and upcoming NZ General Election (Saturday) creating short-term currency roadblocks. As outlined before, we believe a lot of negatives already look to be factored in to the NZD given it is tracking ~4 cents below our ‘fair value’ estimate. AUD/NZD also looks stretched compared to metrics like yield spreads and broader valuation models. We expect these valuation gaps to narrow in favour of a stronger NZD over the medium-term.
Offshore market forces have helped the AUD outperform (now ~$0.7008), with the AUD appreciating by ~0.2-0.7% on the major cross-rates over the past 24hrs. A softer USD can help the AUD grind up a little over the medium-term, in our opinion. However, domestic macro trends, which can act as a ceiling on the AUD’s upside potential and see the AUD weaken on the crosses, are also building.
As discussed previously, a higher RBA cash rate should translate to a higher average range in the AUD relative to a few years ago (i.e. ~$0.69-0.71 compared to ~$0.6525 averaged over 2024/25), but the negative economic consequences down the track from ‘restrictive’ policy also need to be considered. The elevated RBA cash rate (now 4.85%, a high since 2008) should see Australian economic growth slow meaningfully over the next year, and this will result in a further rise in unemployment. This is the price that needs to be paid to break the back of inflation. As the Australian economy loses steam and the jobs market cracks, we expect markets to contemplate the next RBA easing cycle, albeit this is something we don’t see happening until 2028. For more see Market Musings: RBA – the hike that stops the nation.
