Why is the Euro Rising and Could Loonie Trip up the Longs?

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Market Drivers September 6, 2017
AU GDP misses
EUR at week’s high
Nikkei -0.14% Dax 0.10%
Oil $49/bbl
Gold $1340/oz.

Europe and Asia:
AUD GDP 1.% vs. 1.9%

North America:
USD ISM Non-Manufacturing 10:00
CAD BOC 10:00

It’s been a quiet night of trade in the FX market with dollar see-sawing against the yen while losing some ground against the euro in otherwise listless dealing. The only true mover of the night was Aussie which tumbled below the .8000 figure after AU GDP data missed its mark.

AU GDP printed at 1.8% versus 1.9% eyed as a decline in business investment and surprising fall in inventories caused the miss. Overall the data was solid with household consumption, public spending and net exports all contributing to growth but the rise in wages was muted lagging the overall output numbers which suggest that the RBA is likely to remain on the sidelines for a considerable period into the future.

Analysts at CBA noted that “The next move in rates is up. But we don’t think it arrives until 2018.
As such, market pricing implying an 80% chance of a rate hike over the next year looks too ambitious. in our view.”

Elsewhere, the EURUSD was considerably better bid today, rising to 1.1950 in morning European trade. The market remains wary of any jawboning by President Draghi at tomorrow’s ECB meeting but for now the woes in US appear to trump those concerns. With Hurricane Irma barreling towards the coast of Florida US may be in the path of a second devastating natural disaster whose damage could be in the tens of billions. Under those conditions, it is almost impossible to imagine any Fed tightening by year’s end and a result the US 10 year yield is now dangerously close to 2% which continues to weigh on the dollar.

Finally in North America today the focus will be on the BOC with market anticipating that Canadian monetary officials will signal another rate hike in October. Canadian economic data has been surprisingly robust and BOC has been long concerned with the housing bubbles in Toronto and Vancouver which it hopes to diffuse through higher rates. Still, with greater uncertainty across the US border, the BOC may choose to hold off on any policy moves for now and demur on any signal. If that turns out to be the case USDCAD could quickly pop to 1.2500 as the pair has been grossly oversold in anticipation of a more hawkish tilt from BOC and any disappointment is sure to cause a massive reversal in the pair.

Boris Schlossberg
Managing Director

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