USD/CAD - Two different birds: Loonie falls, Kiwi Rises

The Canadian dollar has stabilized overnight after the Gross Domestic Picture figures on Halloween really spooked investors. Analysts had looked for just a +0.1% m/m increase in August GDP after no change in July. Instead, the outturn was a -0.1% m/m drop as declines in oil and gas and manufacturing more than offset small gains in a majority of other industries. Manufacturing was a particular soft spot, with chemical manufacturing posting its biggest one-month decline in 20 years, and other types of manufacturing being down because of planned maintenance shutdowns. The service sector eked out a small gain of 0.1% and has now expanded for 17 months in a row but this was the first monthly contraction for the economy overall since October 2016.

The FX reaction was pretty brutal – USD/CAD jumped almost 70 basis points and the loonie fell on all its major crosses. This report read yesterday that, "last Friday’s high of USD/CAD $1.2906 will be the level to watch in case of any further disappointment in the economic data" and the actual traded high was $1.2907. Maybe investors caught a break The loonie is back on a $1.28 handle this morning but with the Bank of Canada now likely to sit on its hands for a long time, it would be a surprise if the Canuck buck rallied much further.

USD/CAD expected range: $1.2870 – $1.2910

This current phase of broad U.S. dollar strength began almost two months ago when its index against a basket of currencies reach a low of 91.00 cents. Progress higher since then has been steady and gradual; albeit punctuated by the occasional setback. Last Friday, it reached an intra-day high of 94.83 cents and subsequently it gave back around half a point to 94.30. Yesterday, there was no great directional indicator for the currency and the U.S. dollar index spent the whole day in a very tight range from 94.25 to 94.40.

In the Asian session overnight, the index managed a high of 94.44 but volumes have been light and it is pretty much unchanged this New York morning. Next up on the economic slate is the Institute for Supply Management report on manufacturing. September printed at a fresh cycle high of 60.8; the fastest pace of expansion in 13 years. This was driven by a jump in new orders to 64.6 whilst production was back close to its best level of the year and prices paid surged to 71.5. Expectations for the October number are 59.4 for the headline index and if it is anywhere close to this level, then the U.S. dollar ought at the very least to consolidate its current levels and maybe even push on a little higher as we await the Fed statement early in the New York afternoon.

CAD/EUR expected range: $0.6655 – $0.6685

The economic numbers in Europe were so good on Tuesday that investors have taken the day off to celebrate! A quick look at Wikipedia tells them that today is "a Christian festival celebrated in honour of all the saints, known and unknown. In Western Christianity, it is celebrated on 1 November by the Roman Catholic Church, the Anglican Communion, the Methodist Church, the Lutheran Church, and other Protestant churches."

European stock markets remain open today, though, and have registered solid gains across the Continent, led by a very punchy 213-point increase in Germany’s DAX which stands at a record high of 13,435. French equities are up 0.4%, Spain is up +0.3% and the EuroStoxx index is 0.8% higher. In foreign exchange markets, however, the euro has been much more subdued. Since the start of trading in Sydney overnight, EUR/USD has been trapped in a 25-percentage-point range from $1.1628 to $1.1653 and there’s no great hurry to push it one way or another at the moment. With the holiday today, the euro-zone Purchasing Managers' Index numbers are not being published until Thursday when investors will also get the latest read on the German labour market. Spoiler alert: it’s pretty buoyant.

CAD/GBP expected range: $0.5825 – $0.5860

Two very strong days for the pound at the beginning of the week have now turned into three days of gains after a better than expected set of manufacturing PMI numbers. With a headline number of 56.3, Markit (who compile the data) noted that, "The U.K. manufacturing sector started the final quarter of the year on a solid footing. Production and new order volumes continued to rise at robust rates, as companies benefited from strong domestic market conditions and rising inflows of new export business. Price pressures remained elevated, however, with rates of inflation in input costs and output charges both accelerating and staying well above historical series averages.

"While trade from export markets slowed slightly, orders from overseas continued to rise for the 18th month supported by a robust global economy. The pound’s fluctuating performance may have had some bearing on the softening in export orders, but there were continuing good levels of demand from Europe and the USA so no cause for concern."

The sterling-U.S.-dollar pairing reached a one-month high of $1.3308 whilst the pound-Canadian-dollar pairing hit $1.7160; its best level since the beginning of June. Short positions in the currency have been decisively squeezed out though it might well now require a very hawkish commentary around the interest rate decision on Thursday if the pound is to advance further.