Was it Risk Aversion or NFP that Drove the Buck Higher?

The U.S. dollar traded higher on the back of the non-farm payrolls report but it was the confusion around US-China trade relations that caused the sell-off in equities and spillover to currencies. The main takeaway from the jobs report is that it is good enough for the Fed to raise interest rates in December. 250K jobs were created last month, which was more than the market's 200K forecast but this improvement was offset by the downward revision in September and the slowdown in wage growth. Traders were disappointed to hear that despite President Trump's tweet about a constructive conversation with President Xi, Chief Economic Advisor Kudlow is not optimistic about US-China relations because there hasn't been any massive movement on trade and more importantly, they have not been asked to draft a China deal. What's even more confusing is that after these comments, Trump said he thinks a deal with China could happen. At the end of the day while Trump and Xi could meet at the G20 meeting at the end of the month it remains to be seen whether anything substantial will come out of the meeting. As stocks resumed their slide, investors flocked into the safety of US dollars and if stocks continue to fall, the greenback will resume its rise.

There are two big events for the dollar next week - the Midterm Elections on Tuesday and the Federal Reserve's monetary policy announcement on Thursday.   According to the latest opinion polls, the Democrats could take control of the House with the Republicans maintaining its majority in the Senate. However many races across the nation are very close, so the House could swing either way. Midterm elections typically do not have a significant impact on the markets but given the controversial policies of this Administration, this year's election has become exceptionally important. We know that dollar bulls like the Republican controlled Congress because it supports Trump's policies.   So if we get a split Congress, with the Democrats controlling the House, there could be legislative gridlock that makes it difficult for policies such as the President's middle class tax cut to pass, which would be negative for the U.S. dollar. If the Republicans retain majority of both houses of Congress, the President will feel emboldened to continue with his policies and the uptrend that we've seen in greenback should remain intact. More specifically, if the Democrats win the House, USD/JPY could drop to 112 and EUR/USD could squeeze to 1.15 but if the Republicans control both, USD/JPY could extend to 114 and EUR/USD could slip below 1.13. With that in mind, don't expect the midterm elections to have a long term impact on the greenback as investors will move onto the Fed meeting and the outlook for monetary policy quickly.

While the Federal Reserve is widely expected to leave interest rates unchanged and reiterate their plans to raise interest rates in December, the tone of the FOMC statement could be more cautious. We know from the Beige Book that the central bank is worried about trade uncertainties and since the last policy meeting in September there's been more setbacks that improvements in the US economy. As shown in the table below, there's been weakness in consumer spending, inflation the housing market and manufacturing activity. Although the labor market remains strong and many districts report labor shortages, many companies had a cautious guidance this quarter so hiring demand could ease. With that in mind, this FOMC statement is not a significant one because its right after a rate hike and there's no press conference so not much will change so the dollar impact could be limited.

The Australian and New Zealand dollars will also be in focus with Reserve Bank monetary policy announcements from both nations. We know that the RBA remains firm in their neutral policy stance - they believe that interest rates need to remain low to support the economy and see no reason to change that view in the near term. The same is true for the RBNZ. We'll discuss this further next week. Right now, technical indicators are still bearish but AUD/USD has support at 71 cents and NZD/USD at .6550. The uptrend in USD/CAD remains intact after this week's economic reports. Although GDP growth beat expectations, the trade balance failed to turn into surplus like economists had hoped and more importantly, job growth slowed last month. Only 11K jobs were created in October, down from 63K in September. Yet, the sell-off in the loonie was limited because the details of the labor market report were strong. Nearly 34K full time jobs created, pushing the unemployment rate down to 5.8%. Unfortunately, the fact that the loonie cannot rally on this report and the Bank of Canada's talk of more rate hikes last month tells us that risk appetite has a greater impact on the currency. Oil prices have also fallen sharply with the price of Western Canada Select dropping to its lowest level in 2.5 years. Investors are reluctant to buy CAD because they fear that these moves could slow BoC tightening.

As for the euro, the currency saw little change over the past week. Stronger than expected German inflation and employment data were offset by weaker Eurozone Q3 GDP growth and sentiment. Not much has changed for the euro but on Friday, there were reports that the ECB could be considering a new round of targeted long term refinancing operations (TLTROs) but its not clear how true that is because there were also reports that they won't make a decision on this matter at their next policy meeting in December. With no major market moving reports on the Eurozone calendar next week, euro will most likely take its cue from the market's appetite for US dollars. Technically, the downtrend for EUR/USD remains intact as long as the pair remains below 1.1460.