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The Loonie finished yesterday battered and bruised, in retreat mode after the Bank of Canada released their interest rate announcement and caught Loonie bulls by surprise.   We had expected there would be a risk the BoC backed away from its tightening bias, with Governor Poloz indeed softening the central bank’s language in regards to the outlook for monetary policy, going so far as to remove the previous statement that a gradual normalization of policy interest rates could be expected in the future.   Poloz went on to clarify at his press conference that the bank had moved to a more neutral stance on monetary policy, with the risks between a rate cut and a rate hike being fairly balanced at this moment in time.

Moving forward, the BoC continues to juggle two main issues that are conflicting in nature: the need to stimulate export growth and business investment which would benefit from a more accommodative stance on monetary policy, while still acknowledging the already elevated levels of household debt and the potential to exacerbate the problem by encouraging greater lending with lower interest rates.   The risks of aggravating an already precarious housing market have kept the BoC from providing more support for the economy, especially considering the central bank downgraded GDP projections for 2013 and 2014 to 1.6% and 2.3% respectively, while mentioning that the downside risks of inflation persistently coming in below their target are increasing in importance.   With concerns around liquidity in China having already weakening the Loonie, the BoC provided the knock-out which shot USDCAD higher by a big figure on the session.   Momentum has turned in favour of further upside in USDCAD, with the pair breaking through both the 50 and 100 day moving averages while the Stochs completed a bullish cross.

The Loonie managed to a catch a slight bid during the overnight Asian session when the Flash HSBC Manufacturing PMI out of China came in ahead of forecasts at 50.9, but that was short lived as money market rates continued to rise as liquidity dries up.   The survey of manufacturing activity in China eased some concerns about the headwinds facing the region, which saw purchases of inputs increase above 50 for the first time in 9 months, while the employment sub index rose from 48.8 to 49.9.   Given the big difference we saw last month between the flash and final readings, it is hard to put too much stock in today’s number, although it has helped combat some of the weakness being drawn from escalating repo rates.   The Shanghai Composite finished its session down by 0.86%, while the AUD and CAD both lost ground against the USD as the commodity-linked currencies struggle continues.

The release of Eurozone PMIs didn’t bring with it the same optimism seen in China, as the Composite reading came in at 51.5, missing expectations of a 52.5 print.   The number was weighed down by the softness in the juggernauts of the region, as both France and Germany saw their service and manufacturing sectors come in south of what analysts had forecast.   The good news for the region is that the PMIs continue to remain in expansionary territory (except for France’s manufacturing sector), it’s just the pace of expansion that has slowed from the previous month.   While the PMI numbers were far from generating champagne popping excitement, they do corroborate the bumpy path to recovery in the EU, and the lengthy time it will take to make any meaningful headway.   The EUR had been supported throughout the Asian session on rumors central banks in Asia were heavy buyers, which has helped stem the drop seen after the release of the PMIs, with the EURUSD trading up through 1.3800 on strong demand.

Moving on to the North American open, equities are looking to bounce back from yesterday’s weakness, with S&P futures on firm footing before the opening bell.   The energy complex is essentially flat as WTI continues to trade south of $97/barrel on its front month contract, while the spread between WTI and WCS narrows slightly to $30/barrel.   The economic data releases this morning were focused south of the 49th  parallel, with jobless claims and trade balance figures for the US both hitting the wires.   The numbers were largely a non-event, with the United States trade deficit widening slightly to $38.8bn, although below estimates of a 39.5bn gap in exports.   Jobless claims still appear to be foggy, with continued issues surrounding the California technology update and the government shut-down; weekly claims came in at 350k, slightly higher than the 340k analyst had expected.   Equity futures are slightly off their highs of the session, while momentum buying in USDCAD has the pair closing in on the highs from early October in the low 1.04s.   There is not much major resistance in the way for USDCAD if 1.0420 is violated to the topside, which could bring the 1.0500 level into view pretty quick.      

Looking ahead to the remainder of the day, New Home Sales in the US during the month of September are due to be released at  10:00am EST.   Analysts are expecting to see a continued rebound from the drop witnessed in July, with the median forecast coming in at an annualized reading of 0.43M, slightly higher than the 0.42M registered in August.   While the data is prior to the government shut-down and may be discounted by markets because of its timeliness, the trend is still important when considering the overall health of the housing industry in the US. Should the numbers illustrate a slowing of demand prior to the government shut-down, the CAD might be able to retrace some of its losses against its dollar counterpart down south as the USD comes under pressure.

Further reading:

US data: Jobless claims: 350K, trade deficit: 38.8 billion

EUR/USD – Oct. 24 – Euro Steady as PMIs Disappoint