Dollar Breaks Out, Aussie Wilts

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Market Drivers October 25, 2017
USDJPY hits 3 month highs
AU CPI coo
Nikkei -0.45% Dax -0.05%
Oil $52/bbl
Gold $1271/oz.

Europe and Asia:
AUD AU CPI 1.8% vs.2.0%
EUR IFO 116.7 vs. 116.2
GBP UK GDP 1.5% vs. 1.4%

North America:
USD Durable Goods 8:30
USD New Home Sales 10:00
CAD BOC Rate Decision 10:00

It’s been an active night of trade in the FX market with lots of newflow and movement across the majors.

USDJPY broke out to fresh 3 month highs as US yields continued to advance with benchmark 10 years now within striking distance of the psychologically key 2.5% mark. USDJPY took out the 114.00 figure and if US yields remain bid into North American session the pair is very likely to challenge the 114.50 level as it tries to break out of a three-month range.

In Australia, the story was the opposite as weaker than expected inflation data sent the Aussie tumbling towards the .7700 figure. Australian CPI missed on all fronts with year over year numbers coming in at 1.8% versus 2.0% eyed – well below the RBA’s target range of 2-3%. The news suggests that aggregate demand Down Under remains depressed as housing market starts to cool and that dynamic is likely to keep the RBA on sidelines for the foreseeable future and keep Aussie pinned as Australian yields are likely to decline further until there is evidence of pickup in activity.

Meanwhile, in Europe and UK the news was brighter as IFO beat expectations while UK GDP came in slightly better than forecast. IFO came in at 116.7 versus 116.2 and IFO spokesman suggested that another rise in November would portend an upward revision in German GDP.

In UK the GDP came in at 1.5% versus 1.4% anticipated and helped lift the pound to 1.3200. According to ONS both services and manufacturing grew over the summer but construction continued to contract. Despite slightly better than expected performance UK economy remains plagued by concerns over Brexit and cable still remains continues to be mired under the 1.3500 level as markets follow the progress of the talks.

In North America today, the US calendar contains only 2nd tier data, but in Canada, the BoC meeting will be closely watched. The BoC is likely to temper it rhetoric given the slowdown in inflation and retail sales and could suggest that it will not entertain any further rate hikes this year. That could push USDCAD towards the key 1.2800 resistance level as US and Canadian rate expectations will begin to diverge. However, if Governor Polosz leaves the door open to further tightening in order to deflate the housing bubbles in Vancouver and Toronto the pair could make a violent turn towards 1.2500 as most market players are positioned for a more dovish stance from BoC.

Boris Schlossberg
Managing Director

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