As US election risk fades, so does risk aversion. However, the risk rally has been weak. High beta, trade sensitive emerging market currencies INR, ZAR, TRY and CLP have seen heavy buying in the past week. Markets are pricing in a South African rate hike in November due to rising inflation, giving ZAR an extra boost. Traders remain cautions of the current rally, doubting the fundamentals. Markets are preaching the goldilocks conditions: President Trump will balance out fiscal and monetary easing. Heading into 2019, event risks are low and global growth slowdown is already priced in. Equity markets should further improve and USD weaken.
Today’s meeting of the US Federal Reserve Bank is likely to keep interest rates on hold in the current target range of 2.00-2.25%. Given this and that no press conference is scheduled, market reaction will be limited. In Europe, the European Commission will provide economic forecasts showing Italy’s 2019 deficit to be higher than estimates from the government in Rome. Switzerland’s unemployment fell to 2.4%, which is nearly full capacity: this is likely to trigger inflation. If Trump goes positive on trade in the second half of his presidency, Swiss growth would accelerate, potentially forcing the Swiss National Bank to hike earlier than expected (current expectation: 4-6 months after the European Central Bank’s first hike in September 2019).
By Peter Rosenstreich
