FX market in holding pattern ahead of pivotal US election

AUD: RBA still in no rush to begin cutting rates

The Australian dollar has strengthened modestly overnight as most major currency pairs have traded in tight ranges ahead of today’s US election. It has resulted in AUD/USD rising back above the 0.6600-level. The Australian dollar has derived support from the RBA’s updated policy statement that did not provide a stronger signal that it is preparing to cut rates before the end of this year. The RBA continues to lag behind other G10 central banks in the current easing cycle and left their policy rate on hold again at 4.35% overnight for the eighth consecutive meeting. In the updated policy statement, the RBA reiterated that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards their target range”. The updated SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the mid-point which reinforces the need to remain vigilant to upside risks to inflation and the “Board is not ruling anything in or out”. The RBA’s updated forecasts revealed that they expect core inflation to gradually slow towards 2.5% by the end of the forecast period in December 2026.

Headline inflation is expected to dip to a low of 2.5% sooner by June 2025 before picking back up to 3.7% by the end of next year. The RBA noted that the forecasts published today were very similar to the previous forecasts from August. The main uncertainties to their forecasts include: i) the central projection is for growth in household consumption to increase in the second half of this year as income growth picks up, ii) more broadly there uncertainties regarding the lags of monetary policy and how firms’ pricing decisions and wages will respond to slowing growth in the economy, and iii) the high level of uncertainty over the outlook abroad including the potential impact of China’s recent stimulus measures. It suggests that the release of the Q3 GDP report on 4^th December would have to significantly undershoot expectations to prompt the RBA to cut rates at the final meeting of this year on 10^th December. The Australian rate market is not expecting the RBA to begin cutting rates at least until February of next year. A view that fits with comments from RBA Governor Bullock who stated that” we think we have the right policy settings at the moment” while informing that they didn’t explicitly discuss rate hike or cut scenarios. She added as well that she thinks the market is “fairly on message” on what the RBA is saying.

While the slowing pace of RBA easing is supportive for the Australian dollar it is not the main driver of performance although it has helped it to outperform other G10 commodity currencies this year. We still expect the RBA to lower their policy rate next year towards their estimate of the neutral rate at around 3.50%. Unlike the RBA, the RBNZ is expected to remain more active in cutting rates heading into year end. The RBNZ stepped up the pace of easing last month when it delivered a larger 50bps rate cut lowering the policy rate to 4.75%. The New Zealand rate market is expecting the RBNZ to deliver a back-to-back 50bps cut later this month as well. By the end of next year market participants are expecting the RBNZ to lower their policy rate back closer to 3.00% and below the RBA’s current policy rate. The expected policy divergence will encourage the AUD/NZD rate to move further above the 1.1000-level. However, the outcome from the US election will have a bigger impact on both the Australian and New Zealand dollars. A win for Trump would likely deliver a negative growth shock for China and the global economy weighing on both currencies while a win for Harris would trigger relief rallies. We could see AUD/USD test support on the downside as low as the 0.6300-level if Trump wins and test resistance on the topside at the 0.6900-level if Harris wins.            

YIELD SPREADS ARE ENCOURAGING HIGHER AUD/NZD

Source: Bloomberg, Macrobond & MUFG GMR

EM FX: Latam FX remains under selling pressure ahead of US election

Emerging market currency performance has been mixed over the past week ahead of the US election. The Latam currencies of the COP (-2.2% vs. USD), BRL (-1.3%), and CLP (-0.8%) have been the worst performing emerging market currencies over the past week. It has resulted in USD/BRL and USD/COP hitting new year to date highs of 5.8750 and 4,438.5 respectively. In contrast, the ZAR (+1.2% vs. USD) and the CZK (+0.9%) have been the best performing emerging market currencies.

The week ahead will be pivotal for the outlook for emerging market currencies. With opinion polls and betting markets indicating a tightening race ahead of the US election. We expect an outsized market reaction in the week ahead. A victory for Tump and Red Sweep is the least favourable outcome for emerging market currencies and would encourage the USD to strengthen further in anticipation of higher trade tariffs and looser fiscal policy. We still expect the Fed to deliver a smaller 25bps rate cut at this week’s FOMC meeting, but market expectations over the scale of cuts in the coming years will be pared back further under a Trump win and Red Sweep scenario. In contrast, a win for Harris and a divided Congress is likely to be welcomed initially by emerging market currencies as market participants move to price out the risk of a more disruptive second term for Trump. The Latam currencies of the BRL (-17.9% vs. USD) and CLP (-18.1%) were amongst the worst performing emerging market currencies during Trump’s first trade war between 2018 and 2019.               

The weakness in the BRL is increasing pressure on the BCB to deliver a larger rate hike (50bps or bigger) in the week ahead. The government is under pressure as well to implement spending cuts to help ease investor concerns over the health of the public finances which according to Finance Minister Haddad could come as soon as this week. Spending cuts could reportedly range from BRL30 billion to BRL50 billion. In contrast, the Central European currencies of the CZK and PLN have outperformed over the past week. European currencies have been supported by the paring back of investor pessimism over the growth outlook. The euro-zone economy defied expectations for a slowdown in Q3 as growth picked up to the highest rate since Q3 2022. The Czech rate market has been moving to scale back the amount of CNB cuts ahead of this week’s policy meeting. The CNB are expected to cut rates again this week but to stick to a more gradual pace of easing after delivering smaller 25bps cuts in August and September. Please see our latest EM EMEA Weekly report for more details (click here).

HIGHER RISK PREMIUM PRICED INTO BRL

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	09:30	Services PMI	Oct	51.8	52.4	!!!
US	10:00	US Presidential Election	--	--	--	!!!
US	13:30	Trade Balance	Sep	-83.80B	-70.40B	!!
EC	14:30	ECB President Lagarde Speaks	--	--	--	!!
US	14:45	Services PMI	Oct	55.3	55.2	!!!
US	15:00	ISM Non-Manufacturing Business Activity	Oct	--	59.9	!
CA	18:30	BOC Summary of Deliberations	--	--	--	!
EC	18:30	ECB's Schnabel Speaks	--	--	--	!!
NZ	21:45	Employment Change (QoQ)	Q3	-0.4%	0.4%	!

Source: Bloomberg