- Narrowing CAD/US interest rate spreads boost Canadian dollar
- Canada’s August GDP is expected at 0.2% m/m compared to 0% in July.
- US dollar continues to trade with negative bias
USDCAD open (6:00 am): 1.3959, overnight range 1.3950-1.3994, close 1.3991, WTI $104.04, Gold $3,991.60.
The Canadian dollar caught an updraft that has picked up speed ever since Wednesday’s Bank of Canada and FOMC decisions. The BoC adopted a hawkish tone without any inflation data to back it up. The Fed, by contrast, kept its benchmark unchanged despite plenty of evidence that inflation is rising against a robust economic backdrop. The upshot has been a sharp narrowing in CAD/US yield spreads. Three weeks ago, the 2-year differential stood at -160.4 bps, and today it is -125.7 bps, while the 10-year gap has followed suit, closing from -137.3 bps on October 9 to -111.8 bps.
Meanwhile, a growing number of big bank economists now see two more hikes on top of Wednesday’s increase to 2.50%. The
WTI pushed higher in a $102.45-$104.98 band overnight as Middle East tensions refused to cool. The Houthis claim to have struck Saudi oil facilities, with reports pointing to the Ras Tanura and Rabigh refineries and an Aramco site at Abqaiq, and a tanker in the Strait of Hormuz was hit by explosives fixed to its hull from a small boat. Throw in talk of possible US strikes on Iran once the midterms are done, and crude is heading for an October gain of around 14%, its fourth monthly advance in a row.
Don’t expect FX traders to get too adventurous today. The possibility of a US strike on Iran over the weekend and nerves ahead of Tuesday’s US mid-term elections argue for keeping risk on a short leash.
Asian equities ended the day mixed to higher, but most markets posted October losses, with Australia’s ASX 200 the exception at a 1.82% monthly gain. In overnight trading, Japan’s Topix lost 0.95%, Hong Kong’s Hang Seng climbed 1.46% and the ASX 200 added 0.18%.
As of 7:05 am, the UK FTSE 100 and CAC-40 are flat and the DAX has slipped 0.55%. S&P 500 futures have dropped 1.04%, the DXY is at 101.64, and the US 10-year yield is 4.902%.
EURUSD has climbed to the top of a 1.1170-1.1215 range in NY trading after a choppy Thursday that followed the ECB’s decision to hold rates at 2.50%. The market took a hawkish message from Christine Lagarde after she conceded at her press conference that a rate hike had been on the table. Analysts now expect a move in December. On another note Ms Lagarde announced her plan to resign in February 2027. The data calendar was busy with German and Eurozone releases, led by a 0.4% q/q gain in flash Q3 Eurozone GDP that beat the 0.2% forecast but slowed from 0.6%.
GBPUSD has rallied through a 1.3374-1.3433 band and has clawed back all of its October losses. Call it a relief rally, sparked by the calm reception for Chancellor Healey’s Budget, which has pushed gilt yields lower, and reinforced by expectations that the Bank of England will raise rates to 4.00% next week.
USDJPY slid to the bottom of a 157.12-157.90 range after the Bank of Japan kept rates on hold. The BoJ declared that inflation had reached its 2.0% target for the first time since 2013, fueling speculation about a December hike, though Governor Kazuo Ueda refused to commit.
AUDUSD traded sideways in a 0.7018-0.7044 band, pulled one way by a softer greenback and the other by risk aversion in tech, with expectations of an RBA rate hike next week helping to keep it balanced.
Todays data includes Canada August GDP is forecast to rise 0.2% m/m after a flat July. South of the border, the calendar features the Q3 Employment Cost Index (forecast 0.8% q/q, previous 0.9%) and the Chicago PMI (forecast 55.9, previous 58.8).
