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Price action across major asset classes was fairly muted  on Monday, with the trading week for many currencies beginning in a consolidative fashion ahead of the FOMC policy announcement  on Wednesday.   The S&P managed to finish its session in the green, with the index climbing to new highs after Pending Home Sales and Manufacturing Output in the US missed economists’ forecasts and added further weight to the thesis that we’d see no change in Fed policy on Wednesday, with the pace of asset purchases remaining unaffected.   USDCAD remained frozen at the closing levels of last week, despite bouncing around earlier in the session and gaining some strength after the worse than expected data from south of the 49thparallel.

The overnight Asian session started out on firmer footing after the People’s Bank of China injected 13bn yuan of 7-day reverse repos, ending a two week drought of liquidity which helped the benchmark overnight lending rates ease with one-moth SHIBOR falling to 6.162%.   Equities in the region initially drove higher, however the Shanghai Comp retraced its earlier gains and finished the session off by 0.23%.

The Antipodean currencies have had a rough start to the day, the biggest losers before the North American open after Reserve Bank of Australia Governor Stevens delivered a speech that was very downbeat on the future path for the Aussie.   The RBA chief professed that the lofty level of the AUD is not supported by the region’s levels of costs and productivity, and combined with the fact that terms of trade are likely to fall in the future, Stevens sees the Aussie moving materially lower than where it is today.   Moreover, the head of the RBA reiterated that the ‘taper’ from the Federal Reserve would come at some point, and that there would be a return to the tightening conditions faced prior to September, consequently weighing on the carry-trade as hot money flows to high-yielding currencies dissipates.   AUDUSD has fallen almost 1% on the session, moving below the 0.95 handle on the stark outlook for the Antipodean currency from Stevens, and should give Aussie longs that have been riding the recent wave higher a jolt to assess whether this move is sustainable for much longer.

A quiet European session in terms of data has the GBP and EUR both trading lower against the buck as market participant rotate into the DXY ahead of the US data dump this morning and the FOMC meeting  on Wednesday.   Equities across the Atlantic are moving higher before the North American cross, with the FTSE, Dax, and Stoxx up by 0.55%, 0.24%, and 0.64% respectively.      

Heading into the North American open, there was a deluge of data that hit the wires earlier this morning, with the main releases being Retail Sales and the Producer Price Index from the US for the month of September.   The headline reading for Retail Sales slumped by 0.1% from August to September, missing estimates of a 0.1% increase; but after stripping out the more volatile auto sales numbers, the core print came in on expectations with a 0.4% increase over the prior month, signalling consumers were continuing to spend on discretionary items heading into the government shut-down.   On the wholesale producer price side of things, the numbers came in slightly lower than economists had expected, with the index dropping by 0.1% over the month of September, showing producers were still reluctant to increase prices in fear of hampering demand.   S&P futures and the DXY were little changed after the releases, with something for both the bears and bulls to chew on heading into the open.   Equity futures are flat before the opening bell, while the Loonie is slightly stronger against the USD on demand from price action on the crosses.   The price data on the Canadian economy (Raw Material Prices and Industrial Product) for September came in weaker than forecast, highlighting the struggles the region is having seeing any meaningful pickup in prices, leading to inflation being consistently anchored towards the bottom end of the central bank’s target.   USDCAD has managed to claw back the majority of its overnight losses, and is currently pivoting in the mid-1.04s.    

On the docket for the remainder of the session, Bank of Canada Governor Steven Poloz and Deputy Governor Tiff Macklem are set to appear before the House of Commons Standing Committee on Finance at  12:00pm EST, with the testimonies likely to be parsed by Loonie traders to see if there are any changes in tone or language from the central bank’s communication last week.   Finance Minister Jim Flaherty said yesterday that the government had no plans to tighten lending regulations for the housing market, but planned to investigate if the current conditions suggested a temporary bubble was forming.   Markets paid little attention to Flaherty’s comments, signifying traders and investors are more enthralled with what Poloz and the BoC have to say, increasing the importance of Poloz’s testimony today; another downbeat assessment of the Canadian economy that strengthens the neutral view the BoC currently has recently taken could potentially weigh further on the Loonie and have USDCAD probing the top end of its recent range.

Speaking of monetary policy decision makers, the FOMC is set to release their interest rate statement  on Wednesday  at 2:00p EST; however it is very unlikely we’ll see any meaningful changes in Fed policy at this meeting.   The sluggish employment data and the uncertainty surrounding the impact of the government shut-down will most likely have the Fed content with the current level of monthly asset purchases, waiting for at least a few more months before looking to alter the pace should the employment situation re-emerge on stronger ground.   We see the risk with the FOMC statement  on Wednesday  being skewed to the downside for high-yielding currencies like the Loonie, Aussie, and Kiwi, as the expectations of a “steady-as-it-goes” statement from the Fed is well priced into the markets.

Further reading:

Has the Euro slide against the US Dollar started?

US retail sales drop 0.1% in September – USD slides