Markets were transfixed with the US Mid-Term elections and the prospect of a Republican win, which set bulls on the charge. The prospect of split Government, with the Republicans taking over Congress, is seen as positive as it will limit the fiscal excesses of the Democrats. Inflation is one of the key drivers of the election and much of the inflationary problem is the massive fiscal deficit and debt spending. This may be curtailed if the election unfolds as the polls are indicating.
The positives taken from the election prospects are calming markets and the US Dollar fell due to growing confidence. The EUR regained parity, moving up to 1.0080, while the GBP jumped to 1.1480. The Bank of Japan released their report on the latest monetary policy decision and ‘hawkish’ sentiment is starting to emerge. The Fed’s relentless monetary attack on inflation has driven the massive interest rate differential and this has resulted in a collapse in the Yen. The Bank of Japan is coming to the realisation that this is likely to continue and that they may have to break from their stubborn ultra-low, record low interest rates. The Bank of Japan has been forced to intervene in the FX markets to support the currency and they may decide that a rate rise may be easier and cheaper, in the future.
The softer reserve allowed commodity currencies to rally, with the AUD blowing through 0.6500, while the NZD headed toward the big, BIG figure of 0.6000. It will not be until much later today of even tomorrow, before the election results are confirmed. Markets will then look towards the most important of US CPI.