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The Loonie is touching an 18 month low after the plunge in oil prices and weaker than expected CPI.

Isaac Figueroa

Despite the US dollar’s weakness, the Loonie was not the best performer of the major currencies primarily because of the weaker than expected consumer price index and also because of the initial spike of the US dollar immediately after a more hawkish Fed message in the US yesterday. The crude prices are not helping the Loonie either.

However, the Loonie is helped by a weaker Greenback this morning. Fundamentally speaking, subdued inflation in Canada was countered by the Fed in the US when they revised down their core PCE inflation forecasts to 2.0 percent from 2019 - 2021, which means that they also don’t see an overshoot of the target. This is helping the Canadian dollar compared with the US dollar.

At the time of this writing, the USD/CAD is trading at an important support of 1.3450, representing a fall of only 0.21 percent (stronger Loonie). On the release side, wholesale trade sales month to month (October) came in at 1 percent versus 0.4 a percent read; this is also helping the Loonie marginally.

The US dollar continued falling despite a more hawkish message by Powell yesterday when the market was expecting more dovishness. The Fed continued to include in its statement that further "gradual" rate hikes would be appropriate. The initial spike of the Greenback lasted only one hour against all its crosses immediately after the FOMC release; for instance, the EUR/USD pair fell from 1.1431 to 1.1364 (stronger US dollar). However, the US dollar resumed its downtrend, in the case of the EUR/USD, it touched an intraday high of 1.1486, a new 43-day high in the overnight trading session.

In yesterday’s Powell speech, the Fed was willing to be more cautious and patient given global risks and more controlled inflation. The Fed will probably hike its rate two more times next year because financial conditions are tighter and the Fed has become more data dependent. Powel also mentioned that a balance sheet reduction would continue rapidly. In general, fundamental support for the US dollar is starting to evaporate and monetary policies of the major central banks around the world are beginning to converge. This might not be supportive of a strong US dollar in 2019. It was also interesting to find out that the Fed shrugged off all the political pressure (namely Trump) and all the noise around the US equity market correction. The Greenback is falling this morning along with the global equity markets including the US, Europe, and Asia, as market participants reacted grimly to the Fed’s interest rate increase and its guidance.

Italy has finally struck a budget agreement and deal with the European Commission as both parties settled on a deficit target of 2 percent of GDP, down from 2.4 percent. At issue and still unsolved is the fact that Italy’s debt pile is €2.1 trillion or 131 percent of its GDP. This is second in the Eurozone only behind Greece, and if growth does not reach the anticipated 1 percent next year, this debt pile will only increase. For the time being though, the agreement has removed a significant headwind for investors as the Euro looks to end the year on the front foot.

The initial fall of the EUR/USD immediately after the Fed announcement in the US, from 1.1431 to 1.1364, lasted only one hour. After that, the Greenback weakness pushed the EUR/USD to an intraday high of 1.1486, a 43-day new high in the overnight trading session. The EUR/USD is trading at 1.1454 at the time of this writing.

The UK CPI came in at 2.3 percent as expected, its lowest level since March 2017. The move lower was driven by the recent sharp fall in oil prices. The GBP/USD is in a rally mode trading at 1.2682 after reaching an intraday high of 1.2707. The Pound is helped by the US dollar weakness this morning.

Brexit still dictates the performance of the Pound and with deadline day less than 100 days now seems a perfect opportunity for Parliament to go into recess and MPs to take a 20 odd daybreak.

The Aussie dollar wasn’t helped by the local jobs data initially. For the Reserve Bank of Australia, the strength of the labour market is crucial but as things stand there is a risk for the Aussie dollar that interest rates could be cut in 2019 rather than raised. However, the AUD/USD is climbing higher helped by the US dollar weakness, trading at 0.7129. It reached a low of 0.7086 by the close of yesterday’s trading session.

The Kiwi obtained help from the US dollar weakness; however, it is trading only 0.1 percent higher, and trading at 0.6772 at the time of this writing, because the New Zealand GDP for Q3 came in less than half expected at 0.3 percent. Not a good session for the New Zealand dollar.