October 2018

Oct. 29, 2018 (Western Union Business Solutions)  – The U.S. dollar was camped near multi-month highs after U.S. data printed close to forecast. Consumer income and spending both rose in September while underlying inflation held at the Fed’s 2% sweet spot. Key for the buck this week will be Friday’s October employment report. America’s economy likely added 190,000 jobs in October after it netted 134,000 in September, the fewest in a year. Unemployment is expected to remain at 3.7%, the lowest in nearly 50 years. Wages are forecast to rise at an annual rate of 3.1% from 2.8%. Wage growth above 3% could provide a recipe for dollar strength as it would hint at rising inflation and keep the bar low for the Fed to deliver a fourth interest rate hike of the year in December.

 

CAD

 

Canada’s dollar steadied above six-week lows, but sentiment remained fragile with oil struggling to sustain gains. Oil around $67.50 swung between modest gains and losses. The loonie will look to Canadian growth for August, due Wednesday with forecasts pointing to a 0.0% reading after a 0.2% increase in July. An underwhelming outcome would raise the bar for the Bank of Canada to raise rates after its increase last week to 1.75%.

 

EUR

 

The euro stuck near two-month lows as uncertainty over the head of Germany’s conservative party increased political uncertainty across the continent. Reports today indicated that Angela Merkel may not seek re-election as chair of the Christian Democratic Union. Uncertainty over the outlook for German leadership added to persistent concerns about Brexit and Italy’s budget battle with the EU. European fundamentals, whose tepid shape has pressured the euro, will be in focus this week with midweek data on euro zone inflation and unemployment.

 

GBP

 

Sterling was camped near two-month lows against the strong U.S. dollar. The pound has been in a downtrend since mid-October as a lack of progress with respect to Brexit negotiations has kept uncertainty at an elevated level. The longer it takes for London and Brussels to clinch a Brexit treaty, the greater the risk of no deal, a scenario that could hasten a disorderly exit from the bloc come March. The Brexit fog over Britain points to the Bank of England leaving its main interest rate unchanged at 0.75% on Thursday.

 


USA 

Oct. 24, 2018 (Allthingsforex.com) – The Italian budget woes and a disappointing drop in the Eurozone PMI served as catalysts for the EUR to break below support, sending the single currency under 1.14 in today’s trading session.

The CAD rallied following the Bank of Canada’s decision to raise its benchmark rate to 1.75% from 1.5% and signalling that more rate hikes may come in the future. Canada’s loonie ended its recent losing streak and managed to push the USD sub- 1.30.

Below is the official monetary policy statement as published by the Bank of Canada earlier this morning:

“The Bank of Canada today increased its target for the overnight rate to 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment. However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices. Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative.

The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 per cent over the second half of 2018. Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.

The projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia. Still, investment and exports will be dampened by the recent decline in commodity prices, as well as ongoing competitiveness challenges and limited transportation capacity. The Bank will be monitoring the extent to which the USMCA leads to more confidence and business investment in Canada.

Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies. In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.

CPI inflation dropped to 2.2 per cent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 per cent target through the end of 2020. The Bank’s core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity. Wage growth remains moderate, although it is projected to pick up in the coming quarters, consistent with the Bank’s latest Business Outlook Survey.

Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook. ”

 

Oct. 24, 2018 (Western Union Business Solutions) –  For the first time ever, the European Commission has requested a euro area country to revise its draft budget plans. Italy is not backing down though, and the far-right Deputy Prime Minister Matteo Salvini believes the new measures are necessary to restore economic growth. The proposed budget deficit of 2.4% of GDP is triple the amount forecast by the previous government. Despite being below the 3% deficit limit under eurozone rules, the Commission has given Italy three weeks to present a new plan or face possible fines.   A Reuters report suggested Brexit will be completely overshadowed if the Italian budget crisis escalates.  Italy’s debt to the European Central Bank (ECB) is vast and it is unlikely the central bank will want to buy more Italian bonds than planned. The ECB is expected to end its quantitative easing programme by year-end, making its policy meeting an important event tomorrow.

 

CAD

 

The Bank of Canada is expected to increase interest rates from 1.5% to 1.75% today at 10am EST. A rate hike today could help the Canadian dollar strengthen having been under heavy selling pressure due to a run of poor economic data and the recent fall in oil prices.

 

EUR

 
Economic growth fears in the Eurozone have caused the euro to continue to slide against a basket of currencies. During European trading PMI surveys across the Eurozone showed growth had slowed much faster than originally anticipated, German private sector growth reported slowing to the lowest level in over three years while manufacturing in France hit a two year low. Unsurprisingly market reaction has been unfavourable for the euro, causing it to slide 0.8% against the dollar.

 

GBP

 
Prime Minister Theresa May will meet with conservative lawmakers at a private meeting in parliament as she seeks to calm growing tensions over her Brexit strategy. Ms May will address the “1922 Committee” of backbenchers in her conservative party and attempt to convince them agree to with her proposal. A vote of no-confidence against the PM would be triggered if 48 conservative lawmakers submit letters to the chairman of the 1922 committee to demand such a vote. The Sunday Times said 46 have already been sent. If the PM is unable to convince the Tory backbenchers to support her, this could become a huge risk to the PM’s job and to Sterling.

Oct. 19, 2018 (Western Union Business Solutions) – The U.S. dollar’s latest rally petered out as it encountered technical resistance. The U.S. currency was flat to softer against the euro and sterling, firmer against the yen and weaker against Canada’s loonie. Emerging markets also strengthened against the greenback. The broadly weighted U.S. Dollar Index overnight nearly pushed to fresh October highs, a move that would have lifted it to two-month peaks. The dollar was still on track for a winning week thanks to Fed minutes that pointed to the central bank raising rates at a steady pace over the coming year. Dollar sentiment remains positive with the American unit also benefiting from political risk in Britain and Italy. The uncertain geopolitical situation between the U.S. and Saudi Arabia points to more market volatility over the coming days. North America today releases data on U.S. existing home sales and potentially rate hike clinching data from Canada on inflation and consumer spending.

 

EUR

 

The euro overnight nearly fell through a key technical floor which would’ve shoved the single currency to two-month lows. It could be a matter of time before the euro falls through the bottom of its range after the EU signaled a thumbs down to Rome’s budget for the coming year. So far, the single currency appears to be taking the budget crisis in stride. However, things could quickly get out of hand if the market loses confidence in Rome’s ability to get its fiscal house in order, a scenario that could lead to markedly higher government borrowing costs and potentially spread contagion risk to other fiscally fragile nations in the bloc.

 

GBP

 

Sterling found enough support to keep it above a key psychological floor against the greenback. Sterling is set for a losing week after Britain and the EU failed to reach a compromise separation agreement, keeping alive the risk of a disorderly breakup. Meanwhile, Prime Minister Theresa May’s latest Brexit proposals of sounding amenable to extending the 21-month transition period didn’t sit well with some members of her Conservative party, which added a layer of sterling-negative political uncertainty.

 

CAD

 

The loonie tumbled to fresh five-week lows after disappointing data suggested less scope for area central bankers to raises rates beyond an expected increase next week. Inflation hit the brakes by slowing to an annual rate of 2.2% in September from 2.8%. Meanwhile, lower inflation failed to inspire consumers as retail sales unexpected contracted by 0.1%. While the data is unlikely to stay the Bank of Canada’s hand on rates next week, it suggests less scope for policymakers to tighten policy in the months ahead.

Oct. 18, 2018 (Western Union Business Solutions) –  The U.S. dollar steadied after a Fed-inspired surge overnight to one-week peaks. The greenback was mostly flat against rivals from Europe, Japan and Canada after pushing to its strongest levels since at least Oct. 11. The Aussie dollar was an outlier with gains of its own that came on the back of bullish domestic jobs data. America’s currency got a lift from the latest Fed minutes that showed policymaking mulling how high to boost borrowing rates with the economy in strong shape. The positive for the buck was that the minutes toyed with the notion of increasing rates so high that it restrains growth to ensue the lid stays on inflation. The dollar succumbed to some profit-taking ahead of a slew of U.S. data Thursday on weekly jobless claims, the Philly Fed index and leading indicators.

 

GBP

 

Sterling descended to one-week lows after a high stakes Brexit summit came and went with little to no progress. Adding salt to the pound wounds: U.K. retail sales disappointed with a bigger than expected fall by 0.8% in September, the weakest in 6 months. The data came on the heels of British inflation slowing toward the Bank of England’s 2% goal which fit with the outlook of area borrowing rates staying put over the foreseeable future, a dovish view compared to the hawkish Fed that’s on track to raise rates again this year. The prospect of prolonged uncertainty over Brexit bodes negatively for sterling’s coming prospects.

 

CAD

 

A sharp slide in oil knocked Canada’s commodity-driven currency to one-week lows. Oil moved below $69 a barrel Thursday, a day after staging a 3% plunge. A lack of meaningful Canadian data until tomorrow has led the loonie to take its main cue from oil markets. Come Friday, underlying Canadian inflation is forecast to remain around 2%, the Bank of Canada’s sweet spot, while retail sales are expected to rise by a solid 0.3% for a second straight month. Outcomes near or better than expectations would help to green light a rate hike to 1.75% from 1.50% on Oct. 24 when the central bank issues its next policy decision.

 

JPY

 

The yen tracked major currencies lower against the greenback which clocked one-week peaks versus its Japanese rival. The yen tested the weaker end of its range after the latest Fed minutes showed widespread conviction in policymakers boosting borrowing costs at a continued gradual pace over the coming year which differs from the outlook for Japan where interest rates are expected to remain below zero for the foreseeable future to support the world’s tepidly growing No. 3 economy. Still, downside for the yen has been capped by volatile stock markets, suggesting USDJPY strength may come in dribs and drabs.

 

USD

 

Better than expected U.S. data kept the dollar near one-week peaks. The decline in weekly jobless claims to 210,000 from a revised 215,000 was better than forecasts of a print of 212,000. The Philly Fed index of Mid-Atlantic factory growth slowed less than expected to 22.2 for October, above forecasts of 20.5. The data fit with the thesis of a strong economy and the Fed pushing rates higher over coming quarters.

 

Oct. 17, 2018 (Western Union Business Solutions) – The U.S. dollar was the lead currency Wednesday with the stakes and tensions running high in Europe as another Brexit summit got underway. Nearly across the board gains buoyed the buck against the euro, sterling and Canadian dollar. The dollar also appreciated against the Aussie and kiwi dollars and emerging markets. However, U.S. stock futures pointing to a negative open after yesterday’s robust gains whet some appetite for the safer yen. While stronger, the dollar was confined to a horizontal range with its upside capped by mixed data. The buck’s fate today is seen hanging on the tone of the minutes from the last Fed meeting at which officials raised borrowing rates for the third time this year. Minutes suggesting solid conviction in the central bank pushing rates higher later this quarter and further over the coming year would tend to be dollar-positive.

 

EUR

 

The euro fell toward the bottom of a tight range as it largely shadowed sterling lower against the greenback. While the euro has shown a flare for acrobatics of late, having hit two-week highs this week, Italy’s precarious budget situation has fastened a lid on it. Euro zone inflation confirmed that prices grew by 2.1% annually in September but the more important core rate was a full percentage point lower at 1.1%, a decidedly benign level that keeps an ECB rate hike on a far, second half of 2019 horizon.

 

CAD

 

Canada’s dollar retreated from its highest in nearly two weeks as oil prices dipped, and the greenback enjoyed broad based gains. Market sentiment also turned cautious with Wall Street pointing to a negative open after yesterday’s massive gains. Oil prices were down nearly a percent to below $71.30. Downside for the loonie is likely to prove limited with the Bank of Canada expected to raise borrowing rates in a week.

 

GBP

 

Sterling wilted as another high stakes Brexit summit got underway between Britain and the EU. The Brexit parties remain at loggerheads over agreement on their divorce terms which is keeping alive the risk of a disorderly, no-deal outcome that is considered bearish for the pound. Sterling should serve as a barometer in today’s talks with declines signaling a greater risk of a messy outcome and a rise pointing to progress on a treaty. Sterling also suffered after U.K. inflation moderated more than expected to an annual rate of 2.4% in September, a marked slowdown from 2.7% in August. Core inflation slowed below the Bank of England’s 2% goal.

 

Oct. 11, 2018 (Western Union Business Solutions) – A subdued U.S. dollar slipped to one-week lows against the euro and to its weakest in three against the yen and sterling. However, the big selloff on Wall Street this week amid concerns that a sharp spike in U.S. bond yields could harm the world economy boosted the buck against commodity peers from Canada and Australia. The loonie slumped to two-week lows while the Aussie dollar kept near a 2 ½ year trough. The dollar tends to fare its best when markets slide and investors duck for cover in safer bets. But the buck has largely sat out the latest market meltdown as it’s helped coax Treasury yields down from multiyear peaks while signs of diminishing political headwinds in Europe buoyed the euro and sterling. While a tentative calm returned Thursday with U.S. bond yields down and riskier emerging market currencies higher, caution is likely to persist, particularly ahead of news today on U.S. inflation.

 

USD

 

Softer than expected U.S. data pushed the dollar to session lows. The rattled stock market may take comfort from the latest U.S. inflation data as consumer prices rose at an annual rate of 2.3% in September, below the last reading of 2.7%, and under forecasts of 2.4%. Less volatile core consumer inflation steadied at 2.2%. Weekly jobless claims rose more than expected to a still low 214,000. While inflation remains relatively take, its at risk of climbing given low unemployment and the strong economy. Still, until meaningfully higher inflation materializes dollar gains could be tougher to sustain beyond the near-term as benign price growth can reduce pressure on the Fed to raise rates.

 

JPY

 

The yen was among the winners of the global stock meltdown that started on Wall Street. The yen shines its brightest when the global outlook dims as risk-skittish investors seek traditional safe harbors such as the Japanese currency. The stampede to safety momentarily knocked USDJPY below a key floor that had held since mid-September. The longer volatility sticks around, the better the yen should fare over the near term.

 

GBP

 

Sterling rallied to three-week highs on signs that Britain and the EU might be on the brink of clinching a Brexit treaty over coming days. The pound continues to move in fits and starts in response to Brexit headlines. A securing of a Brexit agreement would represent a big step forward in Britain’s bid to leave the 28-country EU in March 2019. A trade deal would also help to instill some semblance of certainty for U.K. businesses, potentially easing a major headwind on Britain’s economy.

 

EUR

 

The euro scored one-week highs against the greenback, boosted by a reduction in political uncertainty in Italy and Britain. The euro managed a technical victory after it closed above a key support which offered scope for stabilization for a currency that’s fallen to seven-week lows. The euro got a lift from Italy’s economy minister who intends to win back market confidence in its handling of its budget battle with the EU. Italy’s budget crisis remains fluid, suggesting the euro isn’t out of the woods. The euro also rode the U.K. pound’s coattails higher as expectations grow for Britain and the EU to agree on a Brexit treaty.

 

CAD

 

Canada’s dollar tumbled to two-week lows as global growth fears flared and oil prices moderated. The price of crude was a percent lower to below $73 Thursday which depressed the value of commodity-oriented assets. Concerns about skyrocketing bond yields and no end in sight for the U.S.-China trade war have overshadowed Canada’s sturdy economic fundamentals and expectations for the Bank of Canada to raise borrowing rates for a third time this year on Oct. 24. Still, Canada’s bright fundamentals could help slow the loonie’s pace of decline.

Oct. 8, 2018 (Western Union Business Solutions) – The greenback extended a winning streak Monday in holiday-light trade while broader markets remained on a weaker footing. The euro and sterling slid 0.4% and 0.6%, respectively, with the former sinking below support to its lowest in seven weeks. The yen and other safe havens generally outperformed while the Canadian and Australian currencies lost ground. What’s been weighing on broader markets has been supporting the dollar: rising interest rates around the world for both fundamental and worrisome reasons. Italian borrowing rates have climbed, a sign of investor worry in the nation’s debt crisis. U.S. lending rates have risen but for fundamental reasons following bullish U.S. data. Numbers last week showed the lowest American unemployment (3.7%) in nearly 50 years. Moreover, global market weakness is spurring buying of the U.S. currency has a safe harbor. Focus of the week ahead will be U.S. consumer prices, a key gauge of inflation, on Thursday.

 

EUR

 

More weakness drove the euro to seven-week lows against the greenback. Markets are growing increasingly concerned about the shaky state of Italian finances which has led to rising borrowing rates for Rome. Even Europe’s fundamental narrative has shown mounting signs of weakness as data today from top economy Germany disappointed. A gauge of German factory growth unexpectedly fell in August and for the third month running. The euro fell through a key floor against the dollar which potentially sets the stage for further weakness over the coming days.

 

CAD

 

Canada’s dollar dipped to late September lows as oil markets moderated from multiyear peaks and the greenback remained in vogue after a week of mostly bullish U.S. data. Canadian markets have Monday off to celebrate the nation’s Thanksgiving holiday, so price action could prove limited. The odds of Canada raising borrowing rates in a little over two weeks, on Oct. 24, increased after local data last week showed faster than expected hiring of more than 60,000 jobs in September which lowered unemployment to 5.9%, one of the lowest levels in decades.

 

USD

 

The U.S. dollar started the week with broad gains as bullish fundamentals and skittish global markets offered twin pillars of support. The dollar is on a two-week winning streak, helped in part by solid jobs data last week that reinforced expectations for the Fed to lift U.S. borrowing rates. While September hiring underwhelmed with a gain of 134,000, the two prior months were upgraded by a robust 87,000 jobs, and unemployment fell more than expected to 3.7%, the lowest since the late 1960s. And while the lid remains fastened on inflation, prices could be poised to rise given the ultra-low level of joblessness. That puts the focus on consumer prices Thursday. Core inflation is forecast to accelerate to a 2.3% annual rate for September from 2.2%.

 

JPY

 

The yen strengthened above late 2017 lows as global stocks slumped which buoyed demand for a broad range of safer bets like the Japanese currency. But rising U.S. interest rates bode negatively for the yen given how USDJPY is highly sensitive to yield differentials. The yield on America’s 10-year Treasury remained above 3.20%, the highest since May 2011. That compares to the yield on Japan’s 10-year government bond of less than 0.2%. The yen’s rise in the face of yield disparities underscores how markets are more concerned about safety, with many global stocks in the red.

 

GBP

 

Sterling lost ground as caution returned and the greenback remained on a multiweek winning streak. Sterling has recently outperformed thanks to upbeat remarks from EU leaders who have noted scope for a potential Brexit deal by November. Yet until an elusive deal is signed and delivered it will leave sterling vulnerable. Once Brexit and the EU hammer out a trade agreement it would still need to be approved by the U.K. Parliament which remains divided over the type of Brexit to pursue.

Oct. 1, 2018 (Western Union Business Solutions) – A dip in USDCAD to 4-month lows below 1.28 has moved the Value Indicator which in turn could do the same for those USD or CAD buyers that have been sitting on the fence.

The so-called Value Indicator – which is based on moving averages and offers a rough estimate of currency strength – is flashing undervalued after the big move lower in USDCAD. This is good news for USD buyers who are less than a month removed from the market being above 1.32. CAD buyers, on the other hand, continue to benefit from USDCAD having started 2018 below 1.26, amounting to a YTD gain of nearly 2%.

The tentative trade agreement reached between the U.S. and Canada has allowed a big cloud of uncertainty over the latter to dissipate. The trade deal, dubbed the U.S.-Mexico-Canada Agreement, still needs to be ratified by lawmakers. The USMCA reduced trade uncertainty and put the focus on Canada’s sturdy economy and expectations for the Bank of Canada to raise interest rates as soon as its next decision on Oct. 24.

USDCAD could see more volatility later this week when the U.S. and Canada release influential data Friday on jobs and trade, numbers that could also impact the interest rate outlook on both sides of the border.

If indeed USDCAD is undervalued, it could be evident in how it responds to the U.S. and Canadian labor market reports on Friday. Oct. 5, at 8:30 am, EST. The U.S. economy is forecast to add 180k new jobs in September from 201k in August, while the unemployment rate is expected to decline from 3.9% to 3.8%.