Market Guide – USD To Stay Strong Until Year-End

Oil prices move higher over supply concerns

We have seen some substantial fluctuations in the oil price since the start of September. The concerns seem to be supply-driven, as sanctions on Iran have started to bite and there has been an easing of global trade tensions following the trade deal between US, Canada and Mexico. OPEC’s spare capacity, excluding Iran and Venezuela, has dropped to around 1.7mb/day, leaving little room for OPEC to mitigate a further decline from those countries. The upside pressure on the oil price stemming from the supply side has been reversed by a general weak risk sentiment and a sell-off in global equities.

US 10-year yields breaks above 3%

The US 10Y yield in September and October has moved higher, even when we take into account the latest moves lower in risk appetite and yields. Importantly, we have passed the technically important 3% level. The Fed is on auto-pilot until June 2019 when the 3% level is set to be reached, the rate level which the Fed believes to be neither expansionary nor contractionary. With solid growth, high optimism, a strong labour market, PCE core inflation at target and an expansionary fiscal policy, the bar is high for the Fed to stop hiking.

US mid-term elections are mostly noise

The US mid-term elections on 6 November are approaching. The generic ballot polls have moved up in favour of the Democrats, from 47.6% at the beginning of August to 49.7% at the beginning of October. The predominant view remains that the Democrats will win control over the House of Representatives, while the Republicans are set to retake the Senate. A divided US Congress means that Trump will be unable to push his domestic policy agenda through. However there is a risk that he will become even more hawkish on foreign policy and trade policy after the elections.

Brexit ‘end game’ moves closer

Brexit optimism has improved somewhat since the Conservative Party Congress ended on 3 October. But as the EU summit on 18-19 October ended without a deal, GBP will remain volatile and sensitive to Brexit news in the coming months ahead of the EU Summit in December, where we still think it is likely that a deal will be reached. As the ‘end game’ draws closer, the more binary (digital) the event becomes.

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