Market Drivers October 21, 2015

Aussie Kiwi Slide in early Europe
UK PSNBR is slightly lower
Nikkei 1.91% Europe -0.33%
Oil $45/bbl
Gold $1175/oz

Europe and Asia:
AUD Westpac LEI 0.1% vs. -0.3%
GBP UK PSNBR is 8.6B vs. 9.6B

North America:
CAD BOC rate decision 10:00

It’s been a quiet and lackluster night of trade in Asian and early European sessions today with Hong Kong on holiday and the economic calendar barren of any meaningful data. The only volatility came in commodity currency pairs as both Aussie and tumbled for fresh session before finding support ahead of the 7200 and the 6700 levels respectively.

The kiwi is continuing to suffer from yesterday’s weak dairy auction results which saw the first decline in four months. In addition Fitch lowered its rating on Fonterra from AA- to A but maintained its outlook as stable.

The Aussie is also seeing some downward pressure as commodity prices remain depressed and investors continue to express concerns about Asia. One tangential piece of data that is confirming the seriousness of slowdown in the region is the latest IATA data which shows passenger travel within Far East to have increased at a far slower pace than Europe or North Atlantic. That data points suggests that both business and pleasure travel remain depressed as growth continues to decline.

While both Aussie and kiwi are correcting their recent rallies the focus today will shift to the loonie as the North American session is likely to be dominated by the BOC decision. While no analysts expects any change in policy, the market will be keen to hear Governor Poloz’s comments especially in light of yesterday’s stunning victory by the Liberal party.

Although Canadian monetary officials would like to see USD/CAD no lower than 1.3000 in order to help stimulate export flows they may be constrained in their ability to ease further, given the Liberal’s commitment to deficit financing. If Canada does engage in fiscal stimulus then the BOC may remain neutral for the foreseeable future even as the economy remains moribund, with monetary authorities mindful that a double stimulus may cause an unwelcome bump in inflation.

The loonie therefore could see some serious volatility as traders absorb Governor Poloz’s view. Ahead of the meeting analysts are split as to the possible direction of the unit, with some arguing that Poloz’s typically sunny rhetoric may give loonie a boost while other argue that the recent spate of negative data showing clears signs of slowdown in the economy may force Governor Poloz to be more dovish than the market anticipates. We continue to believe that the balance of risks lies to the upside in USD/CAD as the arrival of a new government and the persistent low prices in crude will continue to exert pressure on the loonie.

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