Foreign Exchange Market Recap - "Loonie Toonie" CAD was last week's biggest casualty while the USD continued to rally #BoC #loonie #CAD #Fedratehike

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Although the much-hyped third presidential debate between Donald Trump and Hillary Clinton dominated last week's news cycle, most investors placed their attention elsewhere. About the only item of note stateside was a speech early in the week from Fed vice-chair Stanley Fischer. His speech did nothing to dissuade players from continuing to bet on a rate hike in December. Domestic economic stats, most of them second-tier, came in largely as expected.

The USD continued to rally on firming expectations of a Fed rate hike, and CAD was the week's big casualty. The currency is in an awkward spot: crude prices have continued strong and that should help the loonie, but the consensus appears to be that weak economic growth will constrain any CAD strength. By example, August Retail Sales came in at -0.1% vs call of +0.3% with ex-autos flat vs call of +0.3%. September CPI came in at +1.8%, spot on the call and unchanged from August. Analysts view the loonie's problem as one of low growth and, unlike other countries, an unlikely prospect of deflation. The Bank of Canada's Monetary Policy Report, released Wednesday morning, had little in the way of surprises, nor were traders surprised by the Bank leaving rates unchanged at the time.

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However, in a subsequent press conference, BoC governor Stephen Poloz remarked that the Bank had recently considered monetary stimulus but had decided against it. Given Mr. Poloz's history with the Export Development Corp. and his perceived preference for a weaker loonie, Mr. Market promptly hit the currency hard. CAD had gained on firm crude but that all vanished in a heartbeat, as the currency took a beating. The sales and inflation numbers mentioned previously didn't help either, as well as a revised Q4 GDP forecast: +1.4% downgraded from +1.9%. Mr. Poloz also expressed concern over Canada's less-than-stellar export performance, overlooking the fact that governments elsewhere are also weakening their currencies in an effort to gain export market share. This is an example of diminishing returns - or time for a new approach?

On Friday, Canadian trade negotiators working on a deal with the EU walked out in protest over changes. These negotiations had been going on for five years and were nearly done, until torpedoed by, reportedly, Belgian's Walloon minority. This may add further CAD weakness near term.

The EUR was buffeted by unclear signals from the European Central Bank concerning QE and the possible ending, tapering or continuation of the Bank's 80 bln EUR/month bond purchases, set to end in March/2017. The ECB had expressed impatience over rumours of tapering and ECD head Draghi dismissed them out of hand in his press conference last Thursday. Still, analysts seem to feel that an extension of QE may be in the cards, given the ongoing weakness in the EU economy and the relatively benign degree of inflation – still below 2.0%. The Deutsche Bank crisis continues to stumble along, unresolved, while area politicians look for a face-saving way to bail out the bank without appearing to do so, or see a saviour arrive prepared to save the bank.

The GBP bounced up and down on the outlook for a 'Hard Brexit' as opposed to a 'Soft Brexit', the former negative for GBP and the latter positive. Essentially, a 'Hard Brexit' would mean non-preferred UK access to the EU market but with domestic control over immigration; a 'Soft Brexit' would mean preferred UK access to the EU market, similar to that of Norway, without domestic control over immigration. Obviously the issue is more involved than that, but these are the salient political and economic points. Article 50 is the legislation pertaining to Brexit which must be passed by the UK parliament to set the process in motion. Incidentally, Ireland is now attempting to market itself as a new banking centre for financials looking to exit London as a result of Brexit – leave the City and relocate to Dublin! EU member, EUR currency, low taxes…they might have something there.

In the Far East, little of consequence was reported in Japan, while there was growing concern over the state of the Chinese economy. Numbers released earlier in the week appeared soft but okay, although some analysts are starting to express a degree of mild scepticism over these government-released statistics. NZD gained on technical trading.

Speaking of technicals, the US Dollar Index (USDX), a bellwether index widely following by traders, is on the verge of a so-called 'Golden Cross', where the 50 day moving average (in blue) crosses above the 200 day moving average (in red). If this does occur and, according to the chart below, it is very likely to happen this week, it will be a major bullish signal for the USD.

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Key Data Releases This Week

Forecast

Previous

MONDAY, OCTOBER 24

00:15

CHF

SNB Chairman Jordan Speaks

15:30

CAD

BOC Gov Poloz Speaks

TUESDAY, OCTOBER 25

04:00

EUR

German Ifo Business Climate

109.6

109.5

10:00

USD

CB Consumer Confidence

101.5

104.1

10:35

GBP

BOE Gov Carney Speaks

11:30

EUR

ECB President Draghi Speaks

20:30

AUD

CPI q/q

0.5%

0.4%

WEDNESDAY, OCTOBER 26

10:30

USD

Crude Oil Inventories

-1.9M

THURSDAY, OCTOBER 27

04:30

GBP

Prelim GDP q/q

0.3%

0.7%

08:30

USD

Core Durable Goods Orders m/m

0.2%

-0.2%

08:30

USD

Unemployment Claims

261K

260K

FRIDAY, OCTOBER 28

08:30

USD

Advance GDP q/q

2.5%

1.4%

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