USD/CAD - Loonie Driven by Overseas Events

The Canadian dollar has recovered around half its losses suffered in the post-Gross Domestic Product selloff but it still faces plenty of domestic economic headwinds. The latest of these came with the manufacturing Purchasing Managers' Index Survey which dipped to 54.3 in October from 55.0 in September. Although continuing to signal stronger business conditions at the start of the fourth quarter, the latest improvement in the health of the sector was the weakest since January.

Markit noted, "Both output and new orders rose at slower rates during October. Production increased for the 12th successive month, but at the weakest pace since January. Where output rose, this was mainly linked to higher new orders. Export sales were particularly subdued, meaning that manufacturers were reliant on domestic demand to drive growth during October."

The U.S.-Canadian-dollar pairing is at $1.2840 after printing $1.2905 just after GDP while the Canadian pairing with the pound sterling is at $1.6990 having been as high as $1.7160. There’s no more economic news scheduled for release in Canada today and investors would expect the currency to be driven more by news elsewhere – especially in the U.K. and U.S. – than by events at home.

USD/CAD expected range: $1.2871 – $1.2905

There are multiple media reports that U.S. President Trump will today announce Jerome Powell as the new Fed Chairman to replace Janet Yellen and he has said himself that a formal announcement will be made before he sets off on a foreign policy trip to Asia tomorrow. To the extent Mr. Powell is seen as less likely to tighten policy aggressively that the other frontrunner John Taylor, this has seen the U.S. dollar unwind most of yesterday’s gains. For the moment, Yellen remains firmly in charge at the Fed and yesterday she released a new Federal Open Market Committee Statement for investors to pore over.

They key phrase is that, "Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further".

The U.S. dollar index initially liked what it saw in the Statement and pushed up towards the top of its daily trading range (94.30-94.56) which was the best level since Friday evening. Overnight, however, it has slipped back a touch and now stands firmly mid-range at 94.40 ahead of Friday’s non-farm payrolls report.

CAD/EUR expected range: $0.6650 – $0.6685

Europe is back at work today and after Wednesday’s holiday, Spain, Italy, France and Germany all released their manufacturing PMI numbers this morning. Traders know that growth ended Q3 on a high note and these are the first numbers to show how the momentum carried over into Q4. For the euro-zone as a whole, the final IHS Markit euro-zone Manufacturing PMI rose to an 80-month high of 58.5 in October, up from 58.1 in September.

Growth of both output and new orders remained elevated, while the pace of job creation accelerated to a survey-record high. Markit noted that, "the upturn was again led by a strong-performing core of Germany, the Netherlands and Austria. PMI readings were unchanged in Germany and Austria, while the Netherlands PMI rose to its highest level since February 2011. The expansions in Italy (80-month record) and Spain (29-month high) both accelerated, while the French PMI held steady at September’s 77-month high. Growth was also recorded in Ireland and Greece, meaning all of the nations covered registered expansions for the fifth straight month".

The euro's pairing with the U.S. dollar picked up from the low $1.16’s overnight to open in London around $1.1650. It has been on a $1.16 big figure ever since 7 p.m. London time on Friday and for the whole of this week’s trading it has been trapped in an extremely tight range from $1.1603-$1.1660. The euro-Canadian-dollar pairing, meantime, is at $1.4958; almost exactly unchanged on the day so far but still comfortably above its 20-, 50-, 100- and 200-day moving averages.

CAD/GBP expected range: $0.5860 – $0.5910

Given the mere four-hour time difference between London and the eastern coast of the United States, the Bank of England’s interest rate decision was announced just before publication with this North American commentary. A 25-basis-point rate hike looks a done deal. The main interest will be the split, if any, on the Monetary Policy Committee and then how the BoE's Canadian-born governor, Mark Carney handles the Press Conference which will be given to present the Bank’s latest Quarterly Inflation Report. If he errs on the side of "one and done" and emphasizes a slow and gradual pace of future tightening, the pound could slip back further. If, instead, he adopts a more hawkish tone, the threat of more hikes in 2018 (which are not yet priced in to the market) could set the GBP on another tear higher.

Perhaps the least likely outturn is that the pound ends the day unchanged: it could be quite a volatile 24 hours ahead. Sterling price action this morning has been pretty poor and the pound appears to have fallen victim both to some last-minute profit-taking and fresh political uncertainties after Prime Minister Theresa May was handed the resignation of Defence Secretary Michael Fallon. Technical support is now seen at $1.3195 U.S. with resistance at $1.3295 and $1.3310. The pound has also slipped against the Canadian dollar and this morning sits just below $1.70. The first area of technical support is seen around $1.6935.