Despite a late day sell-off in equities, Thursday marked the end of one of the best months of the year for stocks, with the S&P closing up more than 4% on the month.
The DXY remained well bid during yesterday’s session, with a strong Chicago PMI print suggesting the region felt no ill-effects of the government shut-down in October, which induced a slight “taper-on” feel to the markets.
The Loonie was a notable outperformer on the session, gaining a good amount of ground against the USD and on the crosses, after a modestly stronger than forecast GDP print had Loonie shorts deciding to take profit after the currency’s recent slide. USDCAD ran smack into support at the 38.2% fib retracement level from the recent rally in the low 1.04s, and will continue to be a minor support level before the major level of 1.0380 comes into play (100 day moving average, 50% fib, and cloud top.) Corporate hedgers looking to offload some of their short USD exposure may want to think about the strategic use of limit orders surrounding this level, as the relief rally could run into strong USD buying interest just south of 1.0400.
- Chinese manufacturing PMI at 18-month high – S&P futures mildly positive ahead of the opening bell
- Tough sledding for the EUR as speculation on a more dovish ECB next week pushes the common-currency lower
- Action on the EURCAD cross shoves USDCAD lower as Loonie run from yesterday continues
The overnight Asian session started off on unstable footing, although price action was mixed throughout the different regions. The Nikkei traded with a distinct weight to its tape, dropping in sympathy to the losses experienced earlier in New York. Shanghai started out in positive territory, helped higher with a manufacturers PMI reading from the region that came in with an 18-month high at 51.4. The strengthening of October’s PMI was in line with the trend conveyed by the HSBC PMI, and indicates the apprehension surrounding the rising inflation and SHIBOR rates may be a tad overblown. The Aussie and Loonie were both saw decent volumes trade at the beginning of the Asian session (when compared to the 30 day average), with both currencies gaining ground against the big dollar as traders looked to reposition for the beginning of the month.
Positive manufacturing numbers in China have failed to encourage flows into riskier assets in Europe, with stocks in the region trading lower as we head into the North American cross. The FTSE is essentially unchanged, however the Dax and Stoxx are both down by over 0.2% with traders looking to book profits heading into the weekend. The EUR continues to get trounced as market sentiment builds against the common-currency on the back of the weaker than expected employment and inflation data released yesterday, with EURUSD shedding another 0.5% to put in a test of the 1.35 handle, while EURCAD is closing in on the 50% fib retracement level at 1.4040. With the ECB policy announcement on tap for next Thursday, long EUR positions are content to take some risk off the table, positioning for the possibility Draghi softens his tone on the outlook for monetary policy and what tools may be required to make sure growth makes a meaningful rebound in the zone. For corporates that are naturally short EUR, the reprieve seen over the last few days could be a good opportunity to take some near-term risk off the table, as the EUR beginning to fall into some pretty strong support, along with the fact that next week poses fairly significant event risk surrounding the ECB rate statement. Make sure to speak with your dealing teams to talk about strategy and the best way to position yourself moving into next week.
Moving west, equity futures are slightly positive before the opening bell, trying to start the new month on solid ground and rebound after two days of straight losses. The Loonie is seeing a follow-through in buying interest from yesterday, although a few sturdy technical support levels remain in the Loonie’s quest to push USDCAD lower. The yield spread between 2 yr US treasuries and 2 yr Canadian bonds has begun to widen since late October, and is one of the factors aiding the Loonie recent strength. Oil price action continues to be a headwind for the Loonie, with front-month WTI sinking past $96/barrel, while the WTI-WCS spread widens to the disadvantage of Canadian producers.
Heading into the end of the week, the ISM Manufacturing PMI survey is on the docket for 10:00am EST, where analysts are expecting to see the diffusion index slip to 55.0 in October, down from the 56.20 registered in September. Another strong survey from the manufacturing industry would help DXY bulls build on yesterday’s price action, increasing confidence purchasing managers didn’t face as much of a headwind from the government shut-down as originally anticipated.
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