USD struggling with geopolitical, political and natural storms
The USD is lower against most majors after disappointing economic data, political turmoil at home and abroad and dovish rhetoric from Fed members. Markets are now pricing in close to 100 percent chance of the interest rate staying at 100–125 basis points in September and 31.3 percent of a rate hike December, in early August that probability was 42.81 percent.
The Canadian dollar touched a 26 month high versus the US dollar ahead of the Bank of Canada (BoC) meeting. The Bank of Canada (BoC) will be publishing a rate statement on Wednesday, September 6 at 10:00 am EDT. While no rate change is expected, a hawkish statement could be present as Canadian economic indicators have been stronger than forecasted. Canadian GDP for the second quarter destroyed expectations with a 4.5 percent quarterly growth. The strength of the economy has put a second rate hike to the Canadian benchmark rate firmly on the table but with timing issues that would make the October meeting more suitable for that type of announcement.
Central banks will feature prominently this week with the Reserve Bank of Australia (RBA) already keeping rates on hold on earlier today. In what has been an overriding theme for all major central banks the RBA mentioned weak wage growth and low inflation, but with growth still on target for this year. After the BoC on Wednesday, the next major central bank to hold court will be the European Central Bank (ECB) on Thursday.
The USD/CAD fell 0.21 percent in the last 24 hours. The currency pair is trading at 1.2387 ahead of the interest rate decision on Wednesday by the Bank of Canada (BoC). The Canadian central bank is not expected to raise rates at this meeting, but there is growing probability that they will do so before the end of the year, most likely in October.
The timing of the monetary policy decision is down to uncertainty on what other central banks will do in September. This month could prove crucial for the Fed if it announces the start date of its balance sheet reduction plan. Despite the internal debates about rate increases, all Fed members seem to agree on lowering the size of the balance sheet. The only delay could come if policy makers see no chance of a rate hike in December and instead leave the start of reducing the bond repurchases until the end of the year.
EUR/USD rose 0.088 on Tuesday. The single currency is trading at 1.1912 after North American markets restarted after the labor day holiday. The USD lost ground versus the EUR after political turmoil, soft data and dovish comments from Fed members took a toll on the currency.
Safe haven flows saw the USD back to an oversold position as traders are weighing all the factors in the market and for now the resulting picture is not a positive one for the greenback. A weak US jobs report on Friday and comments from known doves Brainard and Kashkari has put a giant question mark around another rate hike form the Fed this year.
The European Central Bank (ECB) will be front and center this week as it could announce the schedule for its quantitative easing program tapering. Sources from within the central bank came out right after the release of the U.S. non farm payrolls (NFP) stopped the rise of the currency pair above 1.20 by saying the tapering could happen until the end of the year.
West Texas Intermediate rose 2.586 percent in the last 24 hours. The price of WTI crude is trading at 48.55 after refineries that were hit by Hurricane Harvey are slowly coming back online. With higher refinery capacity available crude prices recovered and gasoline prices have come down. The tropical storm at one point closed down about a quarter of the US refining capacity.
Next on the storm watch is Hurricane Irma which could hit Gulf platforms near Florida, which could hurt US supply of crude acting as a catalyst for higher prices if its a substantial disruption.
Market events to watch this week:
Wednesday, September 6
8:30 am CAD Trade Balance
10:00 am CAD BOC Rate Statement
10:00 am CAD Overnight Rate
10:00 am USD ISM Non-Manufacturing PMI
9:30 pm AUD Retail Sales m/m
9:30 pm AUD Trade Balance
Thursday, September 7
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims
11:00 am USD Crude Oil Inventories
Tentative CNY Trade Balance
Friday, September 8
4:30 am GBP Manufacturing Production m/m
8:30 am CAD Employment Change
