Search ForexCrunch

After three consecutive days where gains for the S&P exceeded one percent, North American equity futures are quiet this morning this morning, taking a breather as investors try to decipher if the rebound in equities still has room to run.   The overnight Asian session saw equities rally on the back of the buying panic on Wall Street spilling over to the Nikkei which added 2.64% to its valuation, though the optimism has not filtered through to Europe with the same panache.   USDJPY is holding firm around the 107 handle after Japanese trade data for September showed the deficit increased by more than expected as import prices climbed over the measurement month due to the decline in the Yen accelerating.   The bright spot of the report was that exports manage to increase at the fastest pace in the last seven months at an annual rate of 6.9%, easing concern that geopolitical events and sluggish global growth are outweighing the relative competiveness a weak Yen is providing to exporters.   The real test will be to see exports fair over the month of October, and if the strength in exports can be sustained given the rally experienced by the domestic currency.

Back to Europe, the optimism from yesterday’s reports that the ECB would be adding corporate bonds to its balance sheet in addition to covered bonds and ABS has been tempered somewhat, with ECB member Coene clarifying that while it is a strategy that would mitigate the ECB overpaying for asset purchases, there is no concrete plan on the table to purchase corporate bonds.   Despite the clarification on corporate bond purchases from the ECB, the Euro has failed to recover yesterday’s drop, with a leak that on October 26 it would be reported that eleven banks from six different European countries failed the ECB stress tests.   While the results won’t be finalized until the 26th of October, EURUSD is under pressure and has slipped below the 1.27 handle.

The Pound has experienced a volatile session thus far, and at last check is the worst performing of the majors heading into the North American cross.   The release of the minutes from the last Bank of England policy meeting earlier in the month showed that while Weale and McCafferty continued to vote in favour of a 25 basis point rate hike, the dovish majority became more entrenched in their view of holding firm on interest rates citing lower inflation and a loss of momentum in the Eurozone as main concerns.   Today’s minutes showed that the doves on the BoE continue to worry about premature tightening, especially in an economy characterized by their chief economist as “job-rich but pay-poor.” As such, interest rate expectations on the first hike have moved further back into mid-Q2 2015, which has sent Cable into the mid-1.60s this morning.

Getting set for the North American open, equity futures are pivoting around the unchanged mark, not displaying much of a reaction to the US inflation figures that hit the wires earlier this morning.  The CPI readings over the month of September were fairly stable with core remaining at 1.7% on an annualized basis, and the headline reading ticked up from 1.6% to 1.7%.   While oil had been moving lower since late summer, the capitulation didn’t really begin until the start of October, so it will likely be a few months before we any flow-through effects of lower oil prices on consumer goods – though the core group of the FOMC will be happy to see core inflation remaining pinned below the 2% target.   North of the 49th parallel also saw a data release, with Retail Sales for August missing expectations by a wide margin, as both the headline and core prints dropped by 0.3%.   Expectations had been for the headline reading to remain flat while the ex-Autos number increased by 0.2%, with the misses molding traders views ahead of the BoC meeting later today, and putting upward pressure on USDCAD.   The pair has shot higher into the mid-1.12s before the policy announcement that is due at 10:00EST, with all eyes on Poloz and company as to their assessment of the Canadian economic landscape.   Yesterday’s price action saw hedge funds and leveraged money cover CAD shorts before today’s announcement, so it is possible the market is neutral heading into the announcement, though we would caution against the establishment of fresh CAD shorts as it will be hard for Poloz to get too hawkish.

Further reading:

Canadian dollar on the back foot on weak retail sales, ahead of rate decision

US inflation stays stable – USD strengthens