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The start of the week was a relatively quiet one, with holidays on both sides of the 49th parallel in North America (Thanksgiving for Canada and Columbus Day for the US) sapping volume on Monday and leading to directionless trade for USDCAD. US equities began the day in negative territory after talks between Republicans and Democrats broke down over the weekend, but managed to regain their ground and close in the green when news hit the wires that Senate Majority Leader Harry Reid had tabled a proposal that would fund the government until mid-December, and extend the debt ceiling for to earl next year. The postponement of a late-afternoon meeting at the White House muddied the waters a tad, but the prior optimism from Reid on an impending deal helped equities hold their gains into the close.

Equity futures in North America have been pivoting close to unchanged throughout the morning, initially optimistic that further progress on the political front would be made today, and the October 17th deadline would be adverted. The chatter from the hill is that the two sides are bogged down in intricacies surrounding the tabled proposal, leading markets to believe a resolution is looming. A bout of USD buying early in the European session has led to the DXY outperforming against the GBP and EUR, while the previously stated optimism of a deal in Washington has commodity currencies like the AUD and NZD well bid. The Loonie is slightly weaker against the bigger dollar as we head into the opening bell in North America, a factor of action on the crosses more than supply and demand concerns for the Loonie. The energy complex is feeling some weight heading into the North American open, with front-month WTI slipping below $102/barrel. Gold has been slammed this morning as investor nerves are calmed somewhat; the yellow metal is down 1.11% and changing hands at $1,262/ounce midway through the European session.

Lost in the political circus and lack of liquidity due to bank holidays were the Chinese economic numbers for September that were released over the weekend. While one bad month isn’t cause to raise alarm bells just yet, the statistics painted a less than stalwart picture for the engine of growth in Asia. Exports fell by 0.3% compared to last September, well short of analyst expectations for an increase of 5.5%, and the 7.2% gain that was posted in August, flagging concerns of soft global demand and efforts made by regulators to crack down on manipulated trade data. Adding to the anxiety that the stabilization of economic conditions over the last few months can’t be sustained, growth of electricity consumption slowed to 10.4% on a y/o/y basis in September, lagging the 13.7% seen in August. Consumer prices on the other hand haven’t had the same trouble as the aforementioned numbers, as the annual rate of inflation increased by more than expected and came in at 3.1% compared to one year ago, higher than the median analyst estimate of 2.9%. The warmer than expected inflation reading casts doubt on how much more room the People’s Bank of China has to propel the recovery forward, before credit growth must be restrained for fear of prices spiraling out of control. New loans for September were higher than the market had been expecting, but also raises the question of how long the central bank can keep lending conditions loose before the official inflation target of 3.5% is in jeopardy of being breached. The effects of a less than robust recovery in China would be detrimental to the Canadian economy and the Loonie in general, as the marketplace for Canada’s abundance of commodities depends greatly on demand from Asia.

Focusing on European markets, the sanguine feel from an imminent deal in Washington has equities trading in the green, with the FTSE, Dax, and Stoxx up by 0.87%, 0.73%, and 0.57% respectively. Inflation over the month of September in the UK remain pinned at 2.7% when compared to the last twelve months, missing expectations that consumers would get a slight reprieve and see the rate of increase drop to 2.6%. The higher than anticipated inflation rate increases expectations the Bank of England will be having to raise interest rates earlier than indicated in its forward guidance, and did push the pound up to the 1.6000 level against the USD, before a spur of big dollar buying erased those gains. Another factor that signals the UK economy is heating up, house prices surpassed the previous peak set in January of 2008, indicating the “Help to Buy” scheme is flowing through to markets and stoking demand for housing. The combination of sticky price levels and the potential for “bubble-like” conditions returning to the housing industry could force the BoE to act quicker than expected in regards to interest rates, meaning the upward trajectory for Cable might not have run its course just yet; its trading in the mid-1.59s this morning.

Sentiment of manufacturers in the New York area for the month of October hit the wires this morning, and showed that the relative level of activity remained somewhat downbeat. The diffusion index came in with a reading of 1.5, far below the 7.0 that was expected and the 6.3 posted in September. Manufacturers stated there was no additional demand for further credit at this point in time, as the business opportunities in the region weren’t present; a potentially worrying stat for the Fed to take into consideration.

There is no further tier-one economic releases for North America scheduled for today; however, Loonie traders will have their eye on Canadian Manufacturing Sales for the month of August tomorrow, with expectations for the pace of increase to slow slightly from the 1.7% in July to 0.2% for August. The reversal in USDCAD from the October highs posted last week could gain momentum with a strong manufacturing sales print ahead of the CPI figures at the end of the week, with the next major area of support for USDCAD coming in the high 1.02s where we’ve seen previously decent hedging demand from corporates. To the top-side, the low 1.04s from earlier in October have capped USD strength thus far, and we’d need to see sustained strength through that level before confirming USDCAD has another leg higher in the cards before the end of the year. With the relatively quiet range trading environment we’ve recently seen in USDCAD while the shenanigans in Washington have been going on, limit orders just within the current range will work well for corporations looking to unload some short-term exposure, as the market readies itself for a break in either direction.

Further reading:

EUR/USD falls to perfect support line on US optimism

Aussie continues to climb against the USD