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Capital markets were relatively somber as traders returned to their desk after the long-weekend, with price action driven by dueling Fed speak as the economic calendar was devoid of any tier-one data.   North American stocks spent the majority of the day in the red, but managed to finish off the lows of the day after Minneapolis  Fed President  Narayana Kocherlakota advocated the FOMC keep the overnight lending rate at extraordinarily low levels until the unemployment rate falls below 5.5%.   The S&P recovered to only shed 0.24%, weakening after Atlanta Fed President Dennis Lockhart warned that a December taper was still very much on the table.   The Loonie was under pressure for the majority of the session, sliding against the big dollar as the comments from Lockhart swamped the carry trade and high-yielding currencies across the board; USDCAD made a run at the 1.0500 handle, but USD buying pressure failed to mount a convincing breach to hold the pair above the psychological level.

The overnight session was unable to buck the trend of traders hitting the sell button, with the majors all finishing in the red as investors took some profits and reduced exposure to risk-correlated assets; the Nikkei declined by a modest 0.15%, but the losses were more pronounced in China where the Shanghai Comp slid fell by 1.83%.

There was a slew of data released overnight for the UK, but despite the positive underpinnings, the potential for a quicker tightening of monetary policy across the Atlantic has stocks on weaker ground.   The unemployment rate for the last three months to September in the UK fell to 7.6%, beating analysts’ estimates the rate would remain unchanged at 7.7%, while the claimant count tally fell by more than expected in October, dropping by almost 42k people.   The better employment statistics have so far failed to translate into higher take home pay, with total pay only increasing by 0.7% on a y/o/y basis in September, well below the annually rate of inflation released yesterday at 2.2%.   Despite the modest income growth, the improvements in the labour market are encouraging, and over time as slack is removed will most likely see an increase on wage pressures as the economy recovers.

Following on the heels of the better than forecast employment situation, the Bank of England also released their quarterly inflation report, with the BoE raising their economic forecasts and predicting the unemployment rate has a 41% chance of hitting 7% (one of the bank’s thresholds for assessing an interest rate increase) by the end of 2014.   That being said, Carney also reiterated his commitment to forward guidance as to provide confidence that borrowing costs won’t rise before the recovery in the UK can be assured, and that although the labour market is on firmer ground than originally anticipated, hitting the 7% threshold won’t act as a trigger for automatic rate increases.   While Carney is optimistic that the recovery has taken hold in the region, he did note that more work needs to be done, and that the rebound needs to be strong and sustained before the central bank thinks about raising interest rates.   The pound jumped close to a full figure after the more optimistic economic assessment from the BoE, pushing GBPUSD into the high 1.59s.   Equities on the other hand aren’t quite as happy with the prospect of higher rates sooner than anticipated, with the FTSE falling by 1.52%.

Heading into the North American open, the pessimistic sentiment experienced in global equity markets is filtering out west, as futures on the S&P telegraph a sharply lower open when the bell rings.   Despite the lack-luster equity performance, the Loonie is on slightly stronger footing, although having a hard time pushing USDCAD materially south from the 1.0500 handle.   Front-month WTI is helping the commodity-linked currency hold its ground, with the black gold for delivery in December garnering offers in the mid-$93/barrel range.   With another light day of economic releases in North America, USDCAD is likely to trade between a narrow range of 1.0550 and 1.0450, before the trade balance data is released  tomorrow.   The feeling in the market is one of “buy-the-dips” in USDCAD, with corporate bids close by to sop up demand for any bouts of Loonie strength.  

Looking ahead to  tomorrow, Loonie traders will finally have some data to chew on for this week as Trade Balance figures for September hit the wires  tomorrowmorning.   With the Bank of Canada moving towards a more neutral policy stance in terms of monetary policy, specifically citing weak export growth as one of the underlying factors, the trade balance numbers will most likely garner a fair amount of attention as traders assess whether the BoC’s rather downbeat forecast on the Canadian economy is warranted.   Since the BoC altered their monetary policy statement to reflect a more balanced approach to the future path of interest rates, the underlying economic data has been relatively upbeat, no necessarily reflecting the somewhat sour tone from the last BoC meeting.   Canada’s trade balance is projected to decrease slightly to $1.0bn for September, with exports essentially remaining flat from August, with imports decreasing slightly.   Should demand for exports from Canada increase by a larger amount than expected, the strong print should help the Loonie claw back some of the recent weakness it has experienced; although a strong dip in USDCAD is likely to be met with strong USD buying interest, it would allow corporates short USD a slight reprieve from the challenging trading environment.

Further reading:

EUR/USD Nov.13 – Steady After Weak Eurozone Manufacturing Data

Forex Analysis: AUD/USD Continues Slide from Head-and-Shoulders Pattern