Bank of Canada Signals that Interest Rates Remain “Stimulative”.
Thursday 25 October, 2018
Daily Currency UpdateBig session for the CAD overnight, hitting weekly highs against the greenback after the Bank of Canada signaled a faster pace of monetary policy tightening. The BOC raised the cash rate by 25bp to 1.75% which was of no surprise to markets who had fully priced this in. The accompanying statement triggered the rally in the loonie, with the USD/CAD falling to 1.2969 (76.87 US Cents) representing its highest level since October 17. Greenback strength has clawed back some of the gains, with USD/CAD opening this morning at 1.3051.
The Bank of Canada hawkish undertone comes from the comment that even with its benchmark overnight rate at 1.75% interest rates remain “stimulative,” signaling to market participants more hikes to come. The Bank of Canada in their monitory policy report emphasized to participants that neutralized rates somewhere between 2.5% and 3.5%. The optimism comes from the recent renewed North American pact between the United States, Mexico, and Canada, citing “it will reduce an important source of uncertainty that has been holding back business investment.” Markets are currently pricing three further hikes for next year. Markets are presently pricing three further hikes for next year.
The Canadian economic calendar is light for the balance of the week. Therefore, the technical front for the USD/CAD sees resistance 1.3071 with any downside moves expected to meet first support approaching 1.3029 and second at 1.2987.
Key MoversThe United States Dollar appreciated across the board in overnight trading, as risk aversion continued to dominate market sentiment. The US Dollar Index (DXY) reflected the strengthening Greenback and increased by half a percent to hit 96.43.
Many sources drove momentum, chief among them was the equity market. The S&P500 is on track for its 13th negative day out of 15 and is 8% lower than its late-September high. The catalysts for the falls are numerous and varied. However, the general sentiment is that there will be tighter future global growth. US-China tensions and softer earnings reports aren’t helping either. The falls in equity markets spearheading a general flight to safety across financial markets with the Greenback being a prime beneficiary of the shift in asset allocations.
Moving into Thursday, the economic calendar is a little more interesting with M/M Core Durable Goods Orders printing above expectations at 0.8% vs consensus of -0.9%, Durable Goods Orders ex Transportation missed at 0.1% vs 0.3%. Initial Jobless Claims rose slightly to 215k while Continuing Jobless Claims dropped to 1.636M from last week’s reading of 1.641M. Later this morning we will have Pending Home Sales. FOMC Member speeches today come from Clarida and Mester are 12:15 pm and 5:30 pm EST respectively.
The Euro remains weak this morning when valued against the U.S. Dollar on the back of better-than-expected US data releases yesterday. In the EU Preliminary October Markit PMI came in well below expected, leaving the EU Composite PMI at 52.7, the slowest rate of growth in two years.
Today the European Central Bank held its monetary policy meeting; investors will be looking for any comments about the ongoing concerns between the European Union and Italy over Rome’s budget. The macroeconomic calendar is light with only the release of Germany business confidence survey which missed at 102.8 vs previous of 103.7(IFO-Business Climate).
From a technical perspective, the EUR/USD pair is currently trading at 1.1422. We continue to expect support to hold on moves approaching 1.1395 while now any upward push will likely meet resistance around 1.1428.
Unable to keep pace with a stronger Greenback overnight the Great British Pound has fallen when valued against the worlds reserve currency. The GBP/USD suffered a downward correction from 1.2983 as the European session began and dragged further through the North American session moving to a low of 1.2867 -down by 0.90%. The primary driver for the move was that investors seemed convinced that the UK PM Theresa May would not accept the proposal as she wants a UK-wide customs backstop to be legally binding and included in the divorce bills. Safe-haven buying came in play for the USD and pulled the GBP/USD to a three-week low.
In other news, British mortgage lending fell to a seven-month low in September, a month after the Bank of England raised interest rates. Approved mortgages were down to 37,352 from 42,581 in August according to figures from UK Finance. It seems that there is some apparent pressure on consumers regarding affordability and we as the uncertainty over the impact Brexit will have on the economy.
The Australian Dollar saw an all too familiar story overnight after it failed in its attempts to break through resistance at 71 US cents at the local close yesterday. Opening the morning at 0.7085, upside momentum in the afternoon on improved sentiment in Asia saw a shakeout of sellers before peaking at 0.7105.
Unable to breach strong resistance lines, the Australian Dollar resumed its broader trend lower overnight following heavy losses on equity markets with investors retreating into safe-haven currencies. With the ASX expected to open at least 1.5% lower the Australian dollar is likely to once again look to test key support levels at 0.7050 today. With the Australian dollar opening this morning at 0.7060, cues will once again take its lead from equity markets and a number of data releases in the United States today.
The New Zealand dollar is slightly lower against the US Dollar as jittery investors demands have increased for safe-haven buying. The New Zealand Dollar moved from highs of 0.6567 just before the European session down to a low of 0.6518 during the North American session. As the US-China trade war rages on with 10% tariffs that the US imposed on $200bn in Chinese goods will increase to 25% as of Jan 1st the Kiwi has been one of the sensitive G-10 currencies.
On the technical front support sits at 0.6500 followed by 0.6475, on the upside resistance sits at 0.6550 and 0.6565
- USD/CAD: 1.3029 - 1.3157 ▲
- CAD/EUR: 0.6705 - 0.6735 ▲
- CAD/GBP: 0.5935 - 0.5961 ▲
- CAD/AUD: 1.0796 - 1.0872 ▲
- CAD/NZD: 1.1720 - 1.1789 ▲