Dollar Regains Some Ground in Quiet Trading, FOMC Minutes and US CPI to Watch ahead

Dollar regains some ground as another week starts, rather quietly. Trading could be subdued with US and Canada on Columbus Day holiday today. The greenback weaken before the weekly close last Friday on news that North Korea is preparing to strike another missile that could reach as far as the West Coast of the US. President Donald Trump tweeted again during the weekend, saying that with "agreements violated before the ink was dry, makings fools of U.S. negotiators. Sorry, but only one thing will work!" But Trump didn’t go on to explain what is that "only one thing". Last Thursday, Trump also told reporters that a gathering of top military officials represented the "calm before the storm" And he refused to elaborate after be asked to. But judging from the reactions from the markets today, no one will care what those words means unless the intentions are spelt out clearly.

Merkel made a step towards coalition

In Germany, Chancellor Angela Merkel made a step forward on forming a coalition during the weekend. Her party Christian Democrats reached an agreement with sister party Christian Social Union regarding migrants and refugees. While CSU has been calling for a cap on migrants, Merkel has been rejecting that clearly. but after seven hours of talks on Sunday, it’s agreed that a maximum of 200,000 people will still be taken to the country on humanitarian reasons. Those eligible include "refugees and asylum seekers, those entitled to subsidiary protection, family members, relocation and resettlement minus deportations and voluntary departures of future refugees". There was no detail regarding Europe and pensions but the conclusions would likely be revealed at a press conference today. Merkel would now be ready to move on the more difficult task of negotiation with pro-business Free Democrats and the Greens. Huge differences are present between these parties from taxes to energy.

Thousands protested for unity in Catalonia

Thousands of people protested in Catalonia on Sunday, calling for unity and expressed their opposition to independence. Barcelona police estimated that there were 350,000 people attended. The organizer estimated there were 930,000. Catalan President Carles Puigdemont will address the regional parliament on Tuesday evening. It’s unsure whether he will declare independence as planned. But the scale of the pro-unity protest could give him some pressure to drop that declaration. However, the Spanish government is not doing much to ease the tension and resolve the standoff. Instead, Spanish Prime Minister Mariano Rajoy warned that he could trigger article 155 of the constitution and dismiss the Catalonia government, and call fresh local elections.

May hinted at cabinet reshuffle

In UK, troubled Prime Minister Theresa May hinted that she could reshuffle the cabinet to demote Foreign Minister Boris Johnson. May said that in a newspaper interview that "I’m the PM and part of my job is to make sure I always have the best people in my cabinet, to make the most of the wealth of talent available in the party." That is seen as directed to Johnson who is constantly undermining May’s authority. May could hit the button as soon as the EU summit on October 19/20 completes. Meanwhile, May will be meeting with business leaders to hear what they want regarding relationship with EU after Brexit. Justice Minister Dominic Raab said that UK should "prepare for all eventualities" about Brexit negotiation and "no deal" preparations are in place.

China services PMI dropped

As the Chinese market reopens after a week-long National Day’s holiday, we have got the latest report of the Caixin/Markit services PMI which fell to 50.6 in September, from 52.7 a month ago. This marks the lowest reading since December 2015. The composite output Index, encompassing both manufacturing and services activities) dropped -1 point to 51.4 last month, the weakest since June. As the agency noted, "the Chinese economy generally held up well in the third quarter. However, the expansion in both manufacturing and services cooled in September, suggesting downward pressure on economic growth may re-emerge in the fourth quarter".

Looking ahead…

Developments in Catalonia, UK and the verbal exchanges between Trump and North Korean Leader Kim will be watched for sure. A number of central bank officials are also scheduled to speak this week. In addition, Fed will release the minutes for its September meeting on Wednesday. The September CPI report would be due Friday. UK productions will also be watched. Here are some highlights:

• Tuesday: Australia NAB business confidence; Swiss unemployment rate; German trade balance; UK industrial and manufacturing production, trade balance; Canada housing starts and building permits;
• Wednesday: Australia consumer sentiment; Japan machine orders; FOMC minutes
• Thursday: Australia home loans; Japan PPI, tertiary industry index; Eurozone industrial production; US PPI, jobless claims
• Friday: New Zealand business NZ manufacturing; China trade balance; German CPI final; Swiss PPI; US CPI, retail sales, U of Michigan sentiment

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2489; (P) 1.2537; (R1) 1.2612; More….

Further rise is expected in USD/CAD with 1.2448 minor support intact even though upside momentum isn’t convincing. Rally from 1.2061 would target 1.2777 resistance first. Decisive break there will target key medium term fibonacci level at target 38.2% retracement of 1.4689 to 1.2061 at 1.3065. On the downside, break of 1.2448 will indicate short term topping and turn bias back to the downside.

In the bigger picture, USD/CAD should have defended 50% retracement of 0.9406 (2011 low) to 1.4869 (2016 high) at 1.2048. And with 1.2048 intact, we’d favor the case that fall from 1.4689 is a correction. Break of 1.2777 will further affirm this bullish case. That is, larger up trend from 0.9406 is not completed. And in that case, USD/CAD should target 1.3793 resistance next. However, on the other hand, firm break of 1.2048 will indicate that fall from 1.4689 is at least a medium term down trend and should target 61.8% retracement at 1.1424 and below.

Economic Indicators Update