A continuation of profit-taking in the USD index has largely dictated price action in currency markets this morning, though we believe the pause experienced in the DXY is of technical nature versus deeper fundamental issues. While the slight miss on headline Non-Farm payrolls last Friday was the catalyst which triggered the softness in the greenback, the overall numbers continue to confirm the recovery in the US labour market, which will likely lead the Federal Reserve to raise rates by the middle of 2015. Contrasted by the fact that the Bank of Japan and European Central Bank are both on monetary policy trajectories aimed at aggressively expanding their balances sheets, the divergence in monetary policy between developed central banks is crystal clear. While there are sure to be some wobbles in the greenback as participants gauge when the first rate hike will come from the Fed based on the incoming economic data points, there is little to suggest the rally in the dollar has run out of steam – though temporary breathers are likely to emerge from time to time.
The overnight Asian session opened up the new trading week on strong footing, with the Shanghai Comp leading the pack after posting a gain of 2.27%. Bolstered by a wider than expected trade balance surplus for China over the month of October after exports beat forecasts with growth of 11.6% when compared to a year earlier, investor optimism brightened and participants looked to add exposure to growth-correlated assets. Also hitting the tape were inflation figures for the same month, giving investors’ confidence that the government’s targeted easing programs haven’t yet led to consumer prices spiraling out of control. The CPI basket of goods remained stable at a 1.6% increase when compared to the previous twelve months; giving the government flexibility to remain accommodative towards monetary policy should further action be required to defend economic growth rates for the year.
Heading over to Europe, the big news over the weekend was the unsanctioned independence vote in the Catalan region of Spain, where over 2M Catalans voted in the referendum with 81% of the voters endorsing independence. Though the referendum was not valid from a legal point of view, the resounding support for an independent Catalonia will be hard for Prime Minister Rajoy to ignore, most likely choosing a similar strategy to the Britain where they promised greater autonomy to Scotland in order to have them remain in the UK. The ball now appears to be in Rajoy’s court, and we will see how the government of Spain handles the growing resentment of the Catalan people. The potential for increased unrest has not negatively affected the Euro this morning, with EURUSD edging closer to the 1.25 handle on broad based weakness in the greenback.
As we get set for the North American open, commodity-linked currencies have been outperformers during the overnight session, with the NOK and CAD eliciting buying interest as oil prices spurt higher. Front-month WTI is displaying an order book this is better bid than offered, with the light-sweet crude index changing hands in the mid-$79/barrel range. S&P futures are modestly higher but have shown little conviction as to direction due to a sparse economic calendar ahead of the partial holidays tomorrow in Canada and the US, with the remainder of the session likely to display similar volume characteristics. The continuation of the Loonie’s rally on Friday is running into a slight headwind just before the opening bell, with Housing Starts for the month of October missing expectations and only printing at 183k on an annualized basis. The tier-two data set will likely not prompt a dramatic shift in sentiment given its following a more optimistic labour report that was just recently released on Friday, but it has led to the Loonie giving back some of its overnight gains as USDCAD pushes back away from the 1.13 handle.
Further reading:
Weekly Video Analysis – November 10-14
EUR/USD Nov. 10 – Correcting higher amid NFP echoes, profit taking
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