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Yesterday’s global equity rally has lost some momentum this morning, yet the greenback is having no trouble pushing higher against a broad basket of currencies, outperforming against the Euro and Yen as monetary policy divergence continues to drive the aforementioned funding currencies lower.   The overnight Asian session was highlighted with a shocking third quarter GDP report out of Australia which showed the economy only expanded by 2.7% on an annualized basis when the median analyst estimate had called for growth of 3.1%.   Slumping iron ore prices resulting in a fall in mining investment were one of the main drags on the growth numbers, confirming yesterday’s statement from the RBA that a weaker domestic currency would help rebalance the economy and reduce reliance on the mining sector.   Further downward pressure on AUDUSD might not be enough to stimulate growth over the next year, as interest rate swaps are now pricing in an 88% chance the RBA will institute a quarter of a point cut in the next twelve months.   After the release the Aussie cratered through the 0.84 handle against the big dollar, but has since managed to find some stable ground and has grinded its way back to roughly unchanged in the low 0.84s.

The macroeconomic releases seen early in the European session did little to sway sentiment that the worst is over in the monetary union, with final service PMI numbers adding to the disappointment felt early in the week with the slide in manufacturing activity.   The drastic revision from France’s service flash PMI estimate of 48.8 to 47.9 drove the zone’s composite reading from 51.4 in October to 51.1 in November, adding pressure on Draghi and the ECB to reignite economic activity in the region before they lose a handle on the situation.   This week’s final PMI numbers sets up the last ECB meeting of the year against a sour backdrop, where it is likely the central bank will cut its economic forecasts and Draghi will remain dovish in his press conference.   That being said, the real issue that investors and traders will be focused on is if the ECB will set out to expand the eligible assets for purchase before 2014 is over, or if the conversation of adding sovereign bonds to the balance sheet is something that takes place in 2015.   The Euro order book is weighted more heavily to the offer side against the greenback this morning leading into tomorrow’sECB meeting, with EURUSD slipping into the low 1.23s.

Looking ahead to the North American open, equity futures are churning before the bell, with the bulls and bears in a current stalemate as to which way the S&P will open.   Hydrocarbons have found some buoyancy after yesterday’s drubbing, with WTI pulling itself back above $67/barrel.   The Loonie has seen some supportive bids on the positive price action in crude, but has also garnered attention after November’s ADP employment report illustrated the American economy only added 208k new jobs, lower than the 221k that had been expected, and below the 233k created in October. While not a disaster in terms of employment creation, the soft print has seen some of the froth culled from the greenback, with USDCAD heading back into the high-1.13s.   The buying interest in the Loonie has been somewhat constrained thus far, as traders are still wary to take any outsized positions ahead of the Bank of Canada meeting at 10:00EST.   We envision a fairly balanced statement from the BoC, and one that downplays the recent rise in inflation as being transitory in nature and likely to see downward pressure from lower energy prices.   There is some chatter of a more dovish than expected BoC as they reference the drop in oil prices and the effect these will have on Canada’s energy sector, but given Poloz’s track record, we expect the BoC chief to spin the drop in energy expenses as an opportunity for consumers to strengthen their individual balance sheets, while rebalancing other areas of Canada’s export sector.   Therefore; we see the greater risk being a more optimistic tone highlighting the recent stronger domestic growth could be somewhat insulated from the slide in oil, as terms of trade for Canadian producers aren’t as greatly affected on a relative basis as some of their international counterparts.

Further reading:

ECB Preview: A big step towards QE? 3 scenarios

EUR/USD, GBP/USD, USD/JPY Pivot Points, TA Dec. 3 2014