Market Drivers for November 5 2014

Dollar Rallies as R take Senate
BOJ Kuroda – will continue easing until 2%

Nikkei 0.44% Europe .86%

Oil $76/bbl

Gold $1148/oz.

Europe and Asia:

NZD Unemployment 5.4% vs. 5.5%

CNY HSBC Services 52.9 vs. 53.5
GBP UK PMI Serivces

EUR Retail Sales

North America:

USD ADP 08:15

USD ISM Services 10:00

The US dollar rallied in late Asian session trade in the wake of massive Republican wins during the mid term elections. The Republicans beat even the rosiest projections winning a clear majority in the Senate and retaining key governorships across the nation. The news helped to push USD/JPY through the 114.50 barrier and sent EUR/USD back towards the 1.2500 level.

Part of the reaction in tonights trade was simply a knee jerk move as markets often assume that Republican rule will be more business friendly and will help the US economy grow. However today’s rally in the dollar may be also a bet that the change in legislative leadership would expedite the policy actions of the Fed towards interest rate normalization.

The Republican party is notoriously opposed to Fed’s QE policy and will become quite aggressive at pressuring US monetary officials to change their course. The incoming head of Senate Banking Committee Richard Shelby from Alabama is a long standing Fed foe who opposed any intervention by the Fed in the capital markets in the past and may now use the threat of proposed “audit the Fed” legislation to prompt monetary policy makers to act sooner rather than later.

There is no doubt that monetary policy in US will now become even more politicized than it has been recently and that Ms. Yellen will face a highly hostile group of legislators on her next visit to Capitol Hill. The pressure on the Fed to tighten is sure to escalate if US economic data continues to show improvement. The Republicans will then undoubtedly begin a massive PR campaign for the Fed to stop its “easy money” policies if US growth remains on track.

Therefore the combination of the new political reality and the steady improvement in US data could force the Fed to act earlier than it planned and today’s rally in the dollar is a signal that the currency market now see such a scenario as a strong possibility.

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