USD/CAD - Loonie Stronger as Oil Prices Zoom

The Canadian dollar got a double dose of good news on Tuesday and ended the North American session the equal strongest (with the AUD) of the currencies we follow here. Crude oil was up around 23 cents per barrel with NYMEX spot at $56.66 U.S. per barrel; more than a dollar and a half above last week’s low. The other bit of fundamental good news came from the NAFTA negotiations which are being held to thrash out a new version of the 23-year old Free Trade Agreement between the US, Canada and Mexico. These so-called NAFTA 2.0 talks are taking place as closed-door meetings and no documents from the meetings have been made public. Stakeholders involved in the negotiations are also forbidden from disclosing details.

Nevertheless, it was reported on Bloomberg that, "Mexico sees the nations close to finishing work on telecom, energy and digital commerce chapters in the fifth round of negotiations”. Overnight, NYMEX crude has surged more than a dollar per barrel to a fresh 2017 high of $57.97 (commentators have been warning here about the upcoming Organization of the Petroleum Exporting Countries meeting and the usual jaw-boning about production cuts) and the loonie has had another leg higher to again be the strongest of the major currencies. It opens in North America this morning at $1.2740 U.S. with the pairing with the Australian dollar down at $0.9640.

US Dollar (USD)

USD/CAD expected range: $1.2720 – $1.2790

The U.S. dollar index against a basket of currencies opened the week around 93.50, and 48 hours later, it stands at 93.49, having been as low as 93.30 on Monday and to a high of 93.83 yesterday. The big talking point on Tuesday was the performance of the stock market where the S+P 500 index traded at 2,600 for the first time ever. This index added 17 points during the day (0.64%) with the Dow Jones Industrial Average up a whopping 160 points to 23,600.

The positive mood in equities helped support the U.S. dollar, but overnight it slipped back after digesting remarks from outgoing Federal Reserve Chair Janet Yellen. Speaking at an event in New York Tuesday evening, she said inflation should rebound over the next year or two, although "I will say I am very uncertain about this. My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely… It may be that there is something more endemic going on or long-lasting here that we need to pay attention to.” Interest rate futures markets haven’t changed their implied probability of a 25-basis-point hike at the December Federal Open Market Committee meeting but stock index futures are flat and the U.S. dollar is by a very small margin just in the lower half of its trading range thus far this week. Key technical support is still at 93.30 as the market awaits the Minutes of the last FOMC meeting released at 2:00 EST this afternoon.

Euro (EUR)

CAD/EUR expected range: $0.6655 – $0.6710

The euro had a much calmer day on Tuesday and overnight in Asia it edged modestly higher from a New York close of $1.1735 to a best level of $1.1770 U.S. during the London morning. It has subsequently given back 20 pips of these gains to open in North America today at $1.1750. Against the Canadian dollar, the euro is back below 1.50 and looking to test this week’s $1.4965 low. The focus of attention in currency markets remains very firmly on German politics and the four options facing Chancellor Angela Merkel: She can try to struggle along with a minority government which then risks being defeated in Parliament on any single issue. She can call fresh Federal elections and hope to increase her party’s 33% share of the vote it won in September; she can try to form a Coalition with the SPD who have already rejected this option; or she can try to restart Sunday’s failed talks in the hope that the FDP’s leader might cop the blame for the instability and be prepared to renegotiate.

Overnight Press reports suggest Ms. Merkel’s team expect increasing public and political pressure on the SPD to abandon its aversion to a rerun of a "grand coalition" with the Chancellor’s Christian Democratic Union. On Monday, SPD leader Martin Schulz said: "I will never join a government with Angela Merkel." In response, the Chancellor told ZDF television overnight: "I do hope that they will reflect very intensely about whether they should step up and take responsibility." These two politicians can’t both be right and the outlook for the euro hinges crucially on which one of their views now prevails.

Great British Pound

CAD/GBP expected range: $0.5905 – $0.5940

As of publication time, U.K. Chancellor of the Exchequer Philip Hammond is delivering his annual Budget speech to the House of Commons and investors might expect some greater than usual volatility in the British Pound. Ahead of the Budget, the pound clawed its way up to a best level of $1.3260 U.S. before opening in North America around $1.3240. Against the Canadian dollar, the pound stands at $1.6895; almost exactly a full cent below Tuesday’s high. The Chancellor faces plenty of critics from his own side of the House, let alone on the Opposition benches and he has the seemingly impossible task of spending more while borrowing less against the backdrop of a slowing U.K. economy.

The independent Office for Budget Responsibility (OBR) has already significantly cut its estimates for U.K. productivity growth and with business investment crimped by uncertainties around Brexit, its usual rosy optimism about the medium-term economic prospects is far from guaranteed. Hammond’s morning was taken up with a Cabinet meeting and the usual photo opportunities with the red Budget briefcase; a beautiful sunny Autumn day with the case held high. The speech itself should last around an hour, though the reactions to it will feel like they last forever.