COMPASS Weekly Market Update 31/10/17

November 1, 2017

US Q3 GDP data came in better than expected at 3% following 3.1% in Q2. The US$ initially rose on the back of strong economic growth and optimism that the US tax reforms will pass by the end of this calendar year. However, there is a catch. Refer details below:


US Senate and House are in favour of tax reform (this only allows a smaller $1.5trn in tax cuts vs Trump's planned $2.4trn over a decade). Republicans remain divided (will tax cuts raise the governments budget deficit). House wants deficit neutral tax cuts. It is now anticipated that the proposed tax cuts will be phased in over a 5 year period...not good news for the USD bulls as the USD weakened in response.


Current US Fed member Jerome Powell (dovish Republican) is favoured as President Trump's pick for the next Fed Chair. Markets like this too as it is likely to maintain the steady & consistent rise in equity markets. Lower taxes may lead to stronger economic growth and higher inflation. Powell speaks in NY on Thursday night.

USD/JPY has strengthened 3% in the past week from 111 to 114. The Yen is likely to remain weak as PM Shinzo Abe's election victory with a majority allows a change in the constitution, legalise the military, maintain strong alliance with the US and sustain further fiscal stimulus measures.

As expected the ECB meeting left interest rates unchanged although the slow tapering process has weakened EURUSD by 2%. Draghi wants a weaker Euro as it makes exports more attractive & pushes imported inflation higher. Meanwhile, the Catalonian independence election on 21 Dec 2017 will maintain EUR volatility as Spain remains politically divided.

Australia's Q3 inflation rose by just 0.6% and 1.8%pa. RBA will not raise rates in the foreseeable future (2019). Also, Australia's political uncertainty remains heightened after the High Court disqualified Deputy PM Barnaby Joyce from parliament due to his dual citizenship, plunging PM Malcolm Turnbull's one seat majority into jeopardy as Australia is now governed by a hung parliament until 2 December when the Bi-election for the seat of New England takes place. AUDUSD poised to weaken with near term support at 0.7550 and resistance around 0.7750. Sep retail trade data out on Friday.





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