US presidential debates are front-and-centre

The US dollar is set to be in focus at the start of the Asian session as it reacts to missed non-farm payrolls expectations, revelations from presidential candidate Donald Trump’s recordings and the 2nd presidential debate (beginning 12pm AEDT).

Capitol Hill
Source: Bloomberg

The DXY dollar index pared its initial losses from the non-farm payrolls (NFP) miss on Friday to close down 0.1%, as the figure was unlikely to change the Federal Reserve’s (Fed) course on the way to a December rate hike. Tellingly, the WIRP bond market implied probability of a December rate hike actually increased after the release. The Mexican Peso rallied 1.8% against the USD after the damning recording of Donald Trump was released on Friday, and the USD/MXN cross-rate will be a key barometer of how markets are perceiving the candidates’ performance in the debate today. The issue for markets is the growing defection from Republican ranks against Donald Trump and the growing calls for him to step down. It’s not entirely clear if Trump even could be replaced at this point, and he stated he would not be stepping down over the weekend. But the risk of Trump being replaced with another candidate adds a new element of uncertainty for markets. Despite Republican vice presidential candidate Mike Pence’s strong recent debate performance, his potential elevation to the top spot is unlikely to redress the polls for women and minority voters and may in fact damage white male turn out. But with the Republicans facing the guarantee of a lost Senate, all emergency measures are likely to be on the table.

The Aussie dollar recovered much of its intra-day losses on Friday after the NFP miss to close down 0.05% at US$0.7581. But the trend for the Aussie does look to be lower with probabilities for a December rate rise by the Fed continuing to rise. Although the bond market is not positioned for a big miss in Australian 3Q CPI, were that to occur at the end of the month we could see the Aussie plough through a lot of support levels.

Yen weakness looks to have taken a pause after the NFP number. The Japanese yen gained 0.75% on Friday as safe haven demand returned helped along in no small way by the flash crash in the pound. This trend could be set to continue today as the presidential debate may raise further uncertainty about whether Trump will actually be able to stay in the race.

The pound recovered from the worst of its flash crash losses to finish the session down 1.3% at US$1.2446. But this does not look like the end of the pound selloff as it seems Theresa May’s new government are unlikely to change course from a 'hard Brexit' at the current juncture.

WTI oil dropped 1.3% on Friday closing back below US$50 at US$49.78 after the Russian oil minister said he did not expect to commit to a deal at this week’s OPEC and Non-OPEC meeting in Istanbul. But there is always the potential to surprise, given no one expected a deal at the last OPEC meeting either.

The S&P 500 did not take the GBP flash crash or the NFP miss well, losing 0.3% on Friday. Although the best performing sector was utilities, which has sold off heavily over the past week over rising rates expectations.

Despite this many markets in Asia are looking to open a few points higher. Apart from the Nikkei, which is likely to take a hit from the bout of yen strength on Friday. Chinese markets come back from the National Week holiday today, and attention will be carefully paid to the CNY fix after a big dollar rally and rising expectations for a December rate hike.

The ASX SPI futures are currently pointing to an 8 point rise at the open, but there is plenty of action that could change its course today.

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