Overview: The dollar has fallen against nearly every currency. It had been moving lower at the start of the week, but what seems like a correction broadened and deepened following the US midterm election. The outcome was largely in line with expectations for the Republicans to hold the Senate and the Democrats to take a majority of the House for the first time since 2010. Bonds and stocks have rallied. Asia-Pacific equities were mixed. While equities in Japan, China, and Korea were lower, the rest of the region posted modest gains. European markets are more decisively moving higher and the Dow Jones Stoxx 600 is up near 1.2% in late morning turnover, in which all the major industry groups are higher. US shares are posting gains, The S&P 500 may gap above the 200-day moving average at the open. Most gaps are closed rather quickly, though gap on October 31 remains on filled, and if it is a measuring gap as we have suggested, it points to a test on 2800.
Asia-Pacific
China’s reserves fell by about $34 bln in October to $3.053 trillion. It is the third consecutive decline. China’s reserves have fallen by around $87 bln since the end of last year. The fall in reserves reflects official purchases of yuan to either smooth or resist the downward pressure. Among the best predictors of foreign central bank demand for Treasuries is the direction of reserve holdings. China’s decline in reserves likely means that reduced its holdings of Treasuries. With the obvious market pressure on the yuan (at the start of the year, China paid a premium of around 170 bp over US 10-year Treasuries, and it is now near 35 bp), the neoliberal argument has changed from China should let market forces determine exchange rates to China should do more strengthen the yuan.
New Zealand’s central bank will make its rate announcement later today. Although the strong employment report is unlikely to prompt a rate hike, the RBNZ prepare investors for a move next year. The employment data could hardly have been better. The unemployment rate fell to 3.9% from a revised 4.4% in Q2 (initially 4.5%), and the decline was all the more impressive given the rise in the participation rate (71.1% vs. 70.9%). Average hourly earnings rose 1.4% after a miserly 0.2% increase in Q2. Separately, the two-year inflation outlook was essentially flat a hair above 2.0%. The New Zealand dollar is up about 0.66% near $0.6785, a three-month high. While the $0.6800 area may be psychologically important, chart resistance is seen nearer $0.6835, and the 200-day moving average $0.6900 beckons.
