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The post-mortem of last night’s mid-term election was not all that difficult to interpret, as the GOP secured more than the required number of seats to obtain outright control of the Senate, while adding to their majority in the House, resulting in a resounding victory for the Republican Party.   The consequence of the Republicans gaining control of both the House and Senate have increased expectations that Obama will now attempt to work with the GOP in a consultative fashion leading up to the 2016 election, a gateway to reforms that was not previously possible.   As such, financial markets have responded favourably to last night’s result, with market participants keen on adding back equity exposure to their portfolios, along with boosting the greenback as it continues its march higher.

Aiding in the greenback’s overnight ascent was a reiteration of dovish commentary from Governor Kuroda at the Bank of Japan, saying there isn’t a limit to further policy options in an effort to stamp out the disinflationary pressures in the country.  USDJPY climbed to its highest level since December 2007 on the fresh round of jawboning from Kuroda, with the pair currently pivoting in the mid-114s ahead of the opening bell in North America.   The fresh bout of Yen selling wasn’t sufficient for the Nikkei to make another parabolic leap higher, taking a bit of a breather from the exuberant buying as the index closed up by only 0.44%.

The Euro, like every other major currency when compared to the USD, is getting whacked on the broad-based DXY rally, giving back the majority of yesterday’s gains as EURUSD slides back to the 1.25 handle.   This comes ahead of the ECB meetingtomorrow, where we feel there is a high probability of a short covering rally in the common-currency based on the fact that it will be hard for Draghi to adequately convince the large short crowd that new, and larger, quantitative easing measures are of imminent nature.  There have been rumors circulating that Draghi’s management style has rubbed some on the governing council the wrong way, and that the central bank is a house divided and there is not as much support for further easing measures as markets have anticipated.   While it is well known that Germany has been opposed to some of the more aggressive monetary policy easing measures implemented by the ECB, leaks are beginning to emerge that Germany is not isolated in the ECB, and other central bank heads are critical of Draghi’s leadership.   While we are still a ways removed from what could be considered a mutiny at the ECB, the growing opposition minority could make it harder for Draghi to convey stronger easing policies are imminent, and thus leave the elevated short Euro position vulnerable to short covering.

As we prepare for the North American open, investor optimism has held strong overnight, with S&P futures telegraphing a positive start to the trading day when the opening bell rings.   Front-month crude has managed to put a floor under price action for the time being and is trading in the mid-$77/barrel range, while Gold is feeling the brunt of the “risk-on” feel in financial markets and has dropped to $1,140/ounce as traders rotate out of the yellow metal.   Employment figures for the month of October as measured by ADP just hit the wires, showing the American economy added 230k private jobs last month, a beat of the median forecast of 220k.  Last month’s ADP print undershot the more closely watched Non-Farm Payrolls, so today’s print will likely start traders posturing for job’s day at the end of the week and positing for a slightly more robust number than the 250k posted in September.  Still to come today is the Non-Manufacturing ISM PMI that is due in a little under an hour, with market participants keen to see if activity on the service side of the American economy for the month of October was anything like the robust print seen from the manufacturing sector earlier in the week.

Further reading:

ADP Non-Farm Payrolls +230K – better than expected

EUR/USD: Holding 78.6% Fibo But Stay Bearish & Short – Credit Suisse