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Market watch - 19th October 2017

The Greenback retreated from yesterday’s highs along with US Treasury yields overnight, as yesterday’s worse than expected US Building Permits and Housing Starts also weighed on the Buck overall.  US Housing Starts MoM disappointed the market at 1.13M compared to the 1.18M forecast/previous and US Building Permits MoM came in at 1.22M compared to the 1.25M expected, along with a downward revision for the last release from 1.30M to 1.27M as well. The Federal Reserve Bank Beige Book stated that the pace of US growth was “split between modest and moderate” and that while the trio of hurricanes put downward pressure on the US economy it is still growing.  That said, while the Fed noted a tight labor market, which the FOMC expects to lead to inflation pressure, there is still not significant inflationary pressure at the moment.  On balance, the Fed is still apparently prepared to raise the key Fed Funds rate in December, but the report was not wholly bullish.  The US Dollar fell to a 6-day low versus the Euro, after hitting a 9-day peak yesterday, a three-day low against Swissy after touching a 12-day peak yesterday, and a 6-day trough in its pairing with the Canadian Dollar.  The Buck did improve to a one-week peak in its pairing with Sterling on worse than expected UK Retail Sales MoM, and a 5-month high versus Kiwi on domestic New Zealand political news.
Notably, the US two-year US Treasury yield rose to its highest level in nine years on speculation that Stanford University Economics Professor John Taylor, a noted and aggressive hawk, could be the new Federal Reserve Bank Chair when Janet Yellen’s term expires in February.  This was a main driver of Greenback strength yesterday.  President Donald Trump is scheduled to meet with Fed Chair Janet Yellen today as she is one of five candidates he is considering.
We have the Philly Fed Manufacturing Index scheduled for this morning in a relatively light day for global data

The Canadian Dollar traded to a 6-day peak on the weak US Dollar, despite oil prices falling and ahead of the key Canadian CPI MoM and Retail Sales MoM scheduled for tomorrow morning.  Canadian Manufacturing Sales MoM data came in positive yesterday at +1.6% compared to the -0.1% consensus, and much better than the -2.6% last release. Market participants will be closely watching Friday morning’s data for clues into future Bank of Canada (BoC) policy moves as policymakers have been clear that their future moves will be data dependent. It is not likely that the BoC will increase their key overnight rate next Wednesday but their Rate Statement and BoC Governor Stephen Poloz’s post meeting press conference for guidance. Uncertainty around the future of NAFTA is continuing to play a role, but whether President Donald Trump is really targeting Canada is a big question.  In addition, the Peso has strengthened significantly versus the Greenback since Tuesday’s five-month low which reflects questions regarding the administration’s ability to legislate something as controversial as changes to NAFTA as well. 

The Euro benefited from the US Dollar weakness, as it pushed up to a 6-day peak form yesterday’s 9-day low.  This is largely on USD weakness as there was no top tier data out of Europe today.  Political developments in Spain will likely be back in focus as the deadline for the Catalan President Carles Puigdemont to clarify his position on independence is today. With little in the data calendar for the rest of the week, market focus is turning increasingly towards the European Central Bank (ECB) meeting next week. Traders expect a reduction in the ECB’s bond purchases although we may not see a significant reaction in the euro as we have already seen a substantial repricing of ECB expectations in the FX market over the summer.

The British Pound bucked the trend of US Dollar weakness and fell to a one-week low versus both the Greenback and Euro as UK Retail Sales disappointed the market significantly.  The figure was released at -0.8% compared to the -0.1% forecast consensus, and there was a small downward revision from +1.0% to+ 0.9% on the previous.  This is reflective of market concerns that the devaluation of Sterling combined with significant inflation pressure is weighing significantly on the UK consumer.  In addition, this is consistent with yesterday’s data that showed British wage growth is still lagging well behind general inflation, raising some doubt over whether the Bank of England (BoE) will indeed raise interest next month.  Although most traders still expect the Bank to raise interest rates on November 2nd, many are betting it will then keep them on hold for some time, perhaps throughout 2018. Sterling had already slipped on Tuesday after comments from BoE members were interpreted as dovish. Data on Tuesday showed Britain’s inflation rate hit a 5-year high of 3%, but BoE policymakers told parliament that upward pressure on inflation from sterling weakness would start to wane in the coming months. The two-day EU summit in Brussels kicks off today and Prime Minister Theresa May will try to break the deadlock in Brexit talks during EU leaders’ working dinner later in the day.

The Commodity Currencies were mixed, with the Loonie trading to a 6-day peak versus the Buck, the Australian Dollar hitting a three-day high, but the New Zealand Dollar has fallen to a 5-month low on domestic political news.  The left-leaning Labor Party won the support of a minor nationalist party to form a ruling coalition, following an inconclusive election last month. Winston Peters, the leader of the small New Zealand First party which emerged as the kingmaker from the Sept 23 vote, pledged to back the Labor party, ending weeks of political guessing games. The news sent the New Zealand dollar sliding across the board.  Meanwhile, the Aussie Dollar was boosted by better than expected employment data.  The Australian Employment Change figure came in at +19.8K compared to the +14.1K forecast, with the previous blockbuster release revised down a touch to a still incredibly impressive +53k form +54.2K.  In addition, the Australian Unemployment Rate surprisingly fell 0.1% to 5.5% also.
The Japanese Yen strengthened from a two-week low versus the Greenback yesterday as US Treasury yields fell after their rally yesterday.  Further, a falling FTSE 100 combined with US Equity Futures pointing down reflects risk aversion supporting the Yen.  Japanese All Industries activity was a touch lower than expected at 0.1% compared to 0.2% forecast and previous.
The Swiss Franc followed the Euro stronger overnight while also being assisted by market risk aversion.  In addition, the Swiss Trade Balance was better than expected at 2.92b compared to the 2.47b consensus and better than the 2.20b previous.  The Swissy is likely to continue shadowing the single currency for the foreseeable future.

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