USD/CAD - Could Economic Events Rescue the Loonie?

As in the United States, Canada doesn’t move to Daylight Saving Time until the first Sunday in November. With Europe having moved the clocks back an hour this last weekend, there’s only a four-hour time difference between London and Toronto this week and only a five-hour gap between Continental Europe and those in Canada’s Eastern Time zone. It remains to be seen whether the seasonal shift will bring any respite for the Canadian dollar which surged through the summer months but has recently come under sustained pressure.

Having surprised financial markets not once but twice with interest rate hikes, the Bank of Canada has subsequently seen a sharp deterioration in most of its main economic indicators. Indeed, the so-called "Economic Surprise Index" has plunged over the past six weeks to levels not seen since the fourth quarter of 2016 and U.S.-Canadian-dollar combination has snapped back almost seven cents higher onto a $1.28 handle reaching a 3 ½-month high of $1.285 on Friday. The week ahead brings data on consumer confidence today, then it’s Gross Domestic Product and producer prices Tuesday, manufacturing Purchasing Managers Index data Wednesday and employment and international trade Friday. A decent run of economic news (or at least nothing worse than expectations) might finally offer the Canadian dollar some respite after its recent mauling.

USD/CAD expected range: $1.2810 – $1.2880

The last Saturday in October is when Europe changes clocks, so London is now back on Greenwich Mean Time (GMT). Until the U.S. moves back to Eastern Standard Time on the first Sunday in November, there’s only a four-hour time difference between the U.K. and cities on the eastern seaboard of the United States. A Monday morning which always threatened to be quiet in terms of price action in foreign exchange has now been effectively shortened by an hour so there’s even less to report, though the U.S. dollar is generally a touch softer than Friday’s close, other than against the New Zealand dollar which continues to slide.

A very busy week of Tier 1 economic data in the U.S. (Institute for Supply Management surveys and payrolls) kicks off today with personal income and expenditure. The main interest lies in the so-called Personal Consumption Expenditure deflator; the Federal Reserve's preferred measure of inflation. This is expected to edge up from 1.4% y/y in August to 1.6% in September – not enough to ring alarm bells for investors, but moving in the right direction to suggest a Fed rate hike remains on the cards in December. Whilst Janet Yellen will still be in charge at the Fed for that meeting, the White House has said that President Trump will announce his pick for the next Fed Chair before he departs for a trip to Asia on Friday. The choice appears narrowed down to either Jerome Powell or John Taylor, with the latter arguably offering a bit more U.S. dollar support through the prospect of a somewhat faster pace of rate hikes in 2018.

CAD/EUR expected range: $0.6685 – $0.6725

While there’s plenty of fresh news coming up to set the tone for currency markets in North America, last week was the big event for the single European currency. For much of the past few months, the debate has been how the European Central Bank could communicate a scaling-back of Quantitative Easing without signaling a tightening of monetary policy. Last Thursday’s Press Conference saw ECB President Mario Draghi signal a “dovish taper”; a reduction in the pace of bond buying but a commitment that interest rates would not be raised until well after QE finally comes to an end.

Simply put, this means another 12 months without a rise in euro-zone interest rates, even as the economic recovery becomes more broadly based and the pace of activity continues to pick up. The euro fell below $1.16 for the first time since early July post-ECB but another fresh high this morning for economic and consumer confidence in the euro-zone has seen the pair recover to a high thus far of $1.1640 U.S. The political situation in Catalonia remains fluid but has thus far not escalated into dramatic or violent demonstrations which might cause further capital flight from Spain. Unless this were to happen, the euro will be supported around $1.1580 U.S. and may attempt a test of its 50-day moving average at $1.1642. Next stop beyond there would be the 100 dma at $1.710 but this looks beyond reach unless U.S. economic data disappoints.

CAD/GBP expected range: $0.5885 – $0.5935

A big week lies ahead for the pound, with the Bank of England confidently expected to raise interest rates for the first time in over 10 years. Thursday’s Monetary Policy Committee meeting should finally see BoE Governor Mark Carney deliver on one of his many threats to tighten monetary policy even though the performance of the U.K. economy remains disappointing under the clouds from Brexit. The BoE has a 1-3% target for inflation and should it go beyond these boundaries (currently it is 3.0%), the governor has to write a letter to the Chancellor of the Exchequer saying what steps he will take to bring it back to target.

Carney’s predecessor Mervyn King allowed the Consumer Price Index to rise to 5.2% without raising rates. Instead, he judged that the costs of bringing inflation back to target were too great in terms of lost output and employment. The current governor is to a large extent trapped by his own rhetoric and a failure to raise rates on Thursday would see his credibility tumble along with the pound. So, whether or not a hike is really necessary right now (and reasonable people can disagree on this) it has to be done simply to save face. The one uncertainty surrounds the Bank’s language; will it be "one and done" or will the MPC warn of more hikes to come in 2018? It is this which will set the tone for the pound for the next few weeks and which could make for a volatile day when the Quarterly Inflation Report is released at the same time as the interest rate decision is announced.