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  • Chatter BoJ looking to expand stimulus initially strengthens USDJPY to the mid-103s before the yen weakness is faded
  • RBA keeps interest rates on hold – continued dovish steer unable to drive AUD lower


  • Construction PMI in UK at highest reading since August 2007 lifts GBP – hurts CAD as Loonie is squeezed on the cross
  • Bank of Canada rate statement on tap for tomorrow – along with a slew of other NA data

Yesterday’s guarded optimism from early in the morning quickly fizzled as the North American session wore on, and investors gauged a stronger manufacturing PMI for the US in November as increasing the chances the Fed could look to trim their asset purchases during the December FOMC meeting.   The manufacturing diffusion index came in with a print of 57.3, up from the 56.4 witnessed in October and the highest headline reading since April 2011.

The stronger than expected print snubbed worries that lagging effects of the Government shut-down would weigh on the psyche of manufacturing companies, with the employment sub-index putting in strong gains coming in at 56.5, and increasing expectations the employment situation in November may be a little brighter than economists are expecting.   That being said, one must consider that the most recent export data form the American government shows that the manufacturing sector makes up 9% of total employment, and contributes 12% to GDP; not quite a lynchpin of economic growth.   With the service sector contributing far more to the economic well-being of the US, watch for this PMI reading on Wednesday to give us a better idea of how November shaped up according to purchasing managers.

The Reserve Bank of Australia kicked off a week chalked full of rate decisions from central banks in developed nations.   As expected, the RBA refrained from altering its course of monetary policy, deciding to leave the overnight cash rate at 2.5%.   The communication from the RBA and Governor Stevens also varied little from last month’s meeting, maintaining the same language of seeing strength in the housing market while reiterating the Aussie remains at “uncomfortable” levels and will likely need to fall further in order for the region to achieve the balanced growth it desires.   While the statement was a bit of a snooze in terms of new thoughts from the RBA, the language around the Aussie should encourage corporates and investors to sell into any AUD rallies; the Aussie was indeed under pressure right after the statement was released, but managed to mount a comeback later in the overnight session getting help from a slightly stronger than expected retail sales print for October and support at the 0.9060 level.

Next on the docket for the Antipodean currency will be Q3 GDP data, of which is expected by analysts to come in steady on an annualized basis from the previous quarter at 2.6%, with the q/o/q   showing a 0.8% increase.   A better than forecast reading could give corporates long AUD a chance to unload some near-term exposure at decent levels, although any material strength is likely to be faded on the bearish AUD outlook from the RBA; AUDUSD is currently testing resistance in the mid-91s, with selling pressure from leveraged names acting as headwinds for continued momentum.

Elsewhere in Asia, the Nikkei managed to rally to finish its session up by 0.6%, while the yen initially weakened on more talk of Japan continuing to expand its stimulus measures; rumors have been circulating the Bank of Japan will increase their sovereign asset purchase program in the neighborhood of ¥5.4tn.   The yen selling on the reports pushed USDJPY into the mid-103s, but that weakness was quickly faded and the pair has fallen a full big figure back into the mid-102s as we approach the North American open.

Turning our attention to Europe, the housing industry continues to heat up in Britain, with the UK PMI reading from the construction sector posting the highest print seen since August 2007.   The November reading came in at 62.6, as strength was seen in both residential and commercial sectors, and increasing confidence the recovery is on stable footing.   While only making up just over 6% of national output, the spillover effects from a stronger housing industry and its importance for discretionary spending and economic growth are a reason the pound is on firmer footing this morning, moving back into the 1.64 region against the USD and looking to test the high posted yesterday.

The Loonie has continued to languish overnight, unable to find any friends in the overwhelmingly bearish environment.   The Sterling’s rise overnight and the impending squeeze on GBPCAD was echoed through the USDCAD pair with CAD sales pushing the latter to a fresh cycle high in the mid-1.06s.   The $/CAD pair continues to pivot around this level heading into the opening bell in North America, underperforming on the crosses as traders position for the Bank of Canada interest rate statement tomorrow.   Opposing macro-drivers are doing little to help the CAD stem its bleeding this morning, and while front month WTI is edging closer to $94/barrel, copper for February delivery is down 0.58% with North American equity futures trading soft with the risk of the S&P losing the 1,800 handle when markets open.

Similar to the decision from the RBA, the Bank of Canada is also forecast to keep at interest rates extremely accommodative levels.   Still holding a neutral view on the outlook for interest rate expectations as export growth remains sluggish, in our view there is little basis for the Bank of Canada to take a more dovish slant than the recent commentary from policymakers has highlighted.   We expect that the risk in any change of language or forecast from the BoC and Poloz would be one that downplays the recent change in tone from the central bank, as GDP data for Q3 was stronger than expected, and the remaining economic indicators haven’t deteriorated materially since the last meeting.   While export growth remains notably lethargic and inflation is subdued, business investment has picked up, with consumer expenditures continuing to provide life support for the overall economy.   As such, the BoC rate statement will most likely remain consistent with what we saw at the end of October, which may have Loonie bears content with taking some profits after the recent appreciation in USDCAD, and give corporates with short USD exposure an opportunity to jump into the market.   Other data points later in the week such as export growth (Wednesday), Ivey PMI (Thursday), and the employment situation (Friday), will give us further indication as to the direction of the Canadian economy heading into the close of 2013, but it is likely Poloz will want to hold off on altering communication to market participants until more incoming data has been received.

More:  Preparing for the ECB