As we probe further into the final quarter of 2013, the dimensions of the macroeconomic environment refuse to remain stagnant, with the start of the new week providing the investment climate with the opportunity to once again highlight its fluid and ever-changing nature.
The Dollar Index (DXY) posted a strong recovery last week after bouncing off the lows seen in back in January, propelled by some re-pricing of market expectations that the Fed may be able to sneak in a “taper” before the end of the year. With the October FOMC statement having dropped the reference to the tightening of financial conditions, along with the stronger than expected ISM manufacturing PMI print, some of the weaker dollar bears became nervous the government shut-down might not of had as big of an impact as previously expected, potentially allowing the Fed to reduce their monthly asset purchases as earlier as December. While there is a risk the Fed moves to scale back the growth of their balance sheet during their December meeting, the low inflationary pressures combined with the fact that a taper prior to Bernanke stepping down could potentially handcuff his successor into following a rather rigid schedule, leaves us skeptical a taper occurs during 2013. The first reading on Q3 GDP and the slightly delayed October employment situation in the US will serve as the lynchpins for the ongoing pendulum-like “taper-on/taper-off” trade, with both releases forecasted to show signs of fatigue. The October ADP number released last week was soggy, indicating the effects of political brinksmanship in the US had expanded past just the government sector – suggesting there is little hope to for the BLS statistic to snub the recent slowing momentum. The upcoming week will be crucial for the DXY, needing help on the data front to sustain continued momentum after the break through the downward trend-line drawn off the highs back in early July; if the American economy shows stronger signs of life than expected, the retracement of the downtrend in the latter half of the year could pave the way for the to set its sights in the mid-82s.
This week also sets the stage for the beginning of the Chinese Third Plenary session, a policy-making summit where important changes for the Asian growth machine have been announced in the past. The summit takes place at the end of this week, with both the service and manufacturing sectors in the region on a slight upswing heading into the meetings. Over the weekend the survey came in on stronger footing than the previous month, increasing to 56.3 from the 55.4 that was registered in the September report, and will help bolster the confidence of the Chinese Communist Party to forge ahead with market reforms aimed at increasing the quality of growth. While it is unlikely the outcome of the meeting will have any pronounced immediate impact on capital markets, the tone is likely to be one that telegraphs market reforms that support growth quality in favour of speed, with the incoming data points likely to echo the soft landing we’ve seen up until now. Looking at ramifications of the likely outcomes from the Third Plenary session, it is doubtful growth-linked currencies generate any surprise upside momentum, as China looks to place its economy on a more normalized growth trajectory.
Turning our attention to Canada, last Thursday’s slight GDP beat cast some doubt as to whether the outlook for the economy is as dovish as the Bank of Canada has transmitted, helping the Loonie become the only major currency to strengthen against the USD on the week. The upcoming week has further domestic data releases sprinkled throughout, with the most important being the number of new jobs added in October, which is set to be released on Friday. While the strong GDP data from Q2 witnessed thus far raises optimism the economy is on firm footing, the balance of data from the region leaves us with a neutral outlook heading into the release. A narrow range between 1.038 and 1.0480 is likely to persist for USDCAD until the end of the week, with the domestic jobs numbers along with the “taper-on/taper-off” trade resonating from the NFP influencing Loonie price action.
Global equities are elevated heading into the beginning of the week, levitating on the relatively strong PMI prints out of China and Europe, which is driving risk appetite this morning. The recent struggles witnessed in the energy complex continue today, despite investors increasing exposure to high-yielding assets, as both Brent and WTI sink further back to reality; front-month WTI has shed 0.3% to trade south of $94.50/barrel. The DXY is on weaker ground this morning, with the Loonie’s winning streak from last week looking set to continue, as USDCAD flirts with losing the 1.0400 level. Fairly strong support for USDCAD lies at the 1.0380 level, with a meaningful break potentially giving the pair legs to move back into the high-1.02s. Factory Orders for the month of September in the US are due at10:00am EST, however the release is not likely to generate anything more than a knee-jerk reaction, as traders position for the main economic events taking place during the latter half of the week.
Further reading:
Keep an eye on EURUSD for shorts after the breakout on the USD Index
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