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USD higher amid FOMC meeting, US Q3 GDP, Further CAD weakness expected, Riksbank goes proactive

 - In an effort to keep its credibility for future manoeuvres, the Fed appears to be closely monitoring household spending and business fixed investments.
 - RBNZ, now in "wait and see mode” with new economic data being a key determinant for further easing
 - Japanese industrial production increased by 1% m/m in September, this unexpected rise decreases the odds of the BoJ making a decision about additional easing this Friday
 - With oil looking to head lower its unlikely that Canada will exhibit anything but baseline growth and a vigilante central bank. This should allow USDCAD to continue to appreciate. USDCAD bullish reversal should have traders refocused on 1.3422.
 - Last week’s signaling of further easing has prompted global central banks to move proactively. The Riksbank referenced that international interest rates are expected to stay low and that Sweden’s monetary policy would need to take this into consideration. The resulting broad Euro weakness can clearly be viewed as the next phase in competitive devaluations and we anticipate other central banks to react as the PBoC and Riksbanks have. 
 
Central Bank actions continue to dominate this week’s economic headlines. Unsurprisingly, the FOMC kept its rate unchanged at 0.25%, citing that policy tightening will be appropriate if the Fed’s dual mandate (promoting maximum employment and achieving price stability) improves. The Fed is also expecting inflation to remain low in the near term but continues to remain optimistic that the 2% target can be achieved in the medium term. In an effort to keep its credibility for future manoeuvres, the Fed appears to be closely monitoring household spending and business fixed investments. The Fed’s inaction at the FOMC meeting was, in any case, not a surprise and we maintain our view that no rate hike will happen in 2015. EURUSD lost more than a figure before bouncing back at 1.0900. Nonetheless, the short-term structure still indicates a negative bias.
 
The Reserve Bank of New Zealand has also decided to keep the rate on hold at 2.75%, after three straight cuts in a row since June of this year. Governor Graeme Wheeler stated that the central bank is now in “Wait and See” mode as new economic data will be a key factor for further easing. In addition, he remains concerned about the knock-on effects of slower growth in China and East Asia. Uncertainties about the timing and the effect of monetary policy tightening in the US also weigh on RBNZ policy. A further rate cut is likely to make sure that inflation, currently at 0.3% for Q3, gets back up near the target range of 1 to 3%.
 
Japanese industrial production increased by 1% m/m in September, stronger than market expectations, while it remains below last year’s level in September (-0.9% y/y). This is mostly due to the improvement in real exports for September (the BoJ index has increased by 1.9%). This certainly decreases the odds that the Bank of Japan’s policy board will decide additional easing at this Friday’s meeting. USD/JPY and JPY crosses were mixed. The pair remains limited by offers, slightly below 121.
 
***Peter Rosenstreich, Head of Market Strategy: Canada: "Oil prices continue to trade lower as news that in an effort to help budget negotiations the US could sell 58 barrels from their strategic reserves hit the market. In addition, oil inventories headed higher according to the American Petroleum Institute data. Commodity currencies specifically the CAD and NOK which are correlated to oil, underperformed. The weaker CAD has given the economy a well needed stimulus kick, which should see GDP rebound from the lows. However, a pickup in growth will do little to influence the BoC to change their dovish tone. Recent comments from BoC members indicate that there is no need for further easing measures as underlying inflation dynamics should ensure reaching the bank’s target. However, inflation remains subdued and it is uncertain that a marginal pick up in exports will translate into price pressure. With oil looking to head lower its unlikely that Canada will exhibit anything but baseline growth and a vigilante central bank. This should allow USDCAD to continue to appreciate. USDCAD bullish reversal should have traders refocused on 1.3422."***
 
***Peter Rosenstreich: Sweden: "In an unexpected move, the Riksbank has extended its government bond buying program by SEK 65bn. The extension will take the purchase program to SEK 200bn and will last until June 2016. The repo rate was left unchanged, however the bank expressed the view that the repo paths average in 2016 will be lower at 0.40% from 0.35% currently. The rationale being that as global conditions were damaging demand leading to weaker inflation expectations. The bank downgraded its 2016 CPI inflation forecast to 1.4% from 1.6%. Finally the Riksbank stated that it stood ready to buy additional securities (balance sheet remains low), cut interest rates and even direct FX interventions should the conditions warrant. Last week’s ECB meeting, which saw Draghi signaling further easing has prompted global central banks to move proactively. The Riksbank referenced that international interest rates are expected to stay low and that Sweden’s monetary policy would need to take this into consideration. The resulting broad Euro weakness can clearly be viewed as the next phase in competitive devaluations and we anticipate other central banks to react as the PBoC and Riksbanks have. EURSEK reversed its bearish momentum but will need to clear 9.4345 to negate the current corrective phase."***
 
Today, traders will be closely watching the US Advanced figure for Q3 GDP, US core PCE Q/Q, US Initial Jobless claims, Russia Gold and Forex Reserve, German CPI, Brazil National Unemployment Rate, Mexican Overnight Rate.

Thursday, 29 Oct, 2015 / 9:14

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