October 24 2018

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. ”

 


USA 

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.