USD/CAD - Dollar Awaits Poloz Speech

The Canadian dollar had another good day on Monday with the pairing with the American dollar falling from a high of $1.2781 to a low of $1.2703. If the dominant theme last week was weakness in manufacturing production and Gross Domestic Product, this week it’s all about firmer oil prices which are a benefit to its shale oil producers. NYMEX crude yesterday rose 2.8% to $57.24 per barrel, while natural gas futures were over 4% higher.

Bank of Canada Governor Stephen Poloz is scheduled to give a speech in Montreal this morning on "Central Banks’ ability to understand inflation" Experts might suggest the easiest way right now is to drive past a gas station and look at the price on the pumps. A large part of the fall in inflation around the world has been driven (no pun intended) by lower oil prices. These have also had the same economic impact as a tax cut because money not spent on filling up the car is essentially the same as a tax cut. Thus, there is the phenomenon of a pickup in economic activity accompanied by very low levels of inflation. Poloz is always a very interesting and thought-provoking speaker. With the U.S.-Canadian-dollar pairing opening around $1.2765 in North America today, it remains to be seen if he can explain low inflation as easily as some other folks can.

USD/CAD expected range: $1.2710 – $1.2830

After some nervousness on Monday over the passage of the Tax Reform Bill, the U.S. dollar index steadied somewhat to open in London around 94.50. As President Donald Trump moved on from Japan to South Korea, he spoke at a joint press conference with President Moon Jae-in after private meetings in which the two leaders reaffirmed their nations’ "ironclad" alliance. Trump said he would not allow Pyongyang to threaten South Korea’s safety and that North Korean President Kim Jong-un was "threatening millions and millions of lives so needlessly". Though he stressed that the U.S. had immense military capabilities, Trump said, "we hope to God we don’t have to use military force". With the euro sliding back (see below) the U.S.dollar index has moved up to 94.85, its best level since last Friday.

In U.S. economic news, Federal Reserve Chair Janet Yellen’s supposedly favourite series – the Job Openings and Labour Turnover Survey (JOLTS) – is released at 10 a.m. New York time today but it still hasn’t gained a lot of traction within the foreign exchange market. A December rate hike appears very much a done deal and it would take either a huge external shock or a sudden sharp decline in the stock market to make investors rethink their views.

CAD/EUR expected range: $0.6740 – $0.6820

It’s recently been quite a rare sight for German economic data to fall short of consensus expectations, but that’s exactly what happened this morning. After a 2.6% m/m jump in August, industrial production fell -1.6% in September compared to forecasts of a more modest -0.9% m/m decline. The euro-U.S. dollar pairing had briefly dipped on to $1.15 figure overnight in Asia, but then after the economic numbers, it took out the overnight low of $1.1584 to move down to a low of $1.1564; its weakest in almost 10 days.

The European Central Bank’s Sabine Lautenschlaeger told Bloomberg TV "We have a strong growth momentum, we have growth for 17 quarters and now the labour market has a solid recovery, the sentiment factors are positive, the financial conditions for firms and households are very favourable, so I’m very confident that the inflation rate will pick up. I think it was correct to reduce the amount [of Quantitative Easing assets] purchased from January onwards. I would have liked to see a clear exit”.

ECB President Mario Draghi’s speech in Frankfurt this morning was about banking supervision rather than monetary policy and he was unsurprisingly quite upbeat about progress made since the financial crisis. For trading in the North American time zone today, the euro still looks pressured against the U.S. dollar and now sits below its 20-, 50- and 100-day moving averages. Major support from the 200dma is not seen until $1.1410.

CAD/GBP expected range: $0.5950 – $0.6000

Despite the growing sense of alarm at the heart of the British political establishment – both over the allegations of improper conduct and now the so-called "Paradise Papers" – the pound sterling didn’t move much at all through the overnight session and opened in London at $1.3160 U.S.; within a few pips of its New York close. It initially shrugged off a very disappointing report from the British Retail Consortium which reported sales down -1.0 y/y which it said, "was driven by the worst performance of non-food sales since our record began in January 2011."

As the London morning passed with little else to comment on, a whole series of bearish analysts’ comments received plenty of media coverage. It’s always a little odd to see when data isn’t acted upon for several hours, but it does at least give those with the courage of their convictions plenty of time to enter into fresh currency positions. The next set of U.K. economic data isn’t until industrial production on Thursday so the very near-term outlook for pound is for it to be stuck between technical support at $1.3050 and resistance around $1.3180. Experts still think there is more scope for the downside to be tested in the coming days, not least if the Opposition Labour Party can land a few blows in the growing debate around tax havens and the U.K. government’s relatively hands-off approach to them.