Monday October 18th, 2021

The US$ and oil prices edge higher, equity markets dip, while US yields firm as risk-off sentiment returns amid China’s economic slowdown. China’s 3rd quarter GDP falls short of expectations as growth slows to 4.9% and industrial production rose by just 3.1% in September vs 4.5% expected. A spokesperson for National Bureau of Statistics said, “since entering the 3rd quarter, domestic & overseas risks and challenges have increased”, and added the power shortage had a “certain impact” on normal production. In other news, UK finance chief fears supply chain issues could drag on into Q4/2022. Oil prices climb to their highest level in 7-years as covid recovery and power generation stoke demand. Tight US jobs market triggers strikes for more pay and better conditions. Covid, In Australia Sydney eases more covid restrictions as vaccinations pass key milestone, while Melbourne to ease the world’s longest covid lockdowns as vaccinations rise. The UK reports the most covid cases in a day since mid-July and Russia reports record-high daily covid infections. In currency markets, the US$ index strengthens in early trading amid rising US Treasury yields and concerns over China’s economic slowdown. CNY is flat while Asian currencies weakened 0.25% on average vs US$. Trading currencies are also under pressure with NOK flat, JPY & NZD down 0.15%, AUD weakens 0.55%, MXN falls 0.7% and ZAR tumbles 1.3% vs US$. Intraday expect the US$ to remain firm as risk-off sentiment prevails, Fed Quarles is speaking, US Monthly Budget Statement, and US Industrial production may impact short-term direction.

Oil prices continue to strengthen with US WTI up +1.5% its strongest level since Oct 2014 and Brent Crude hitting 3-year highs as increased power generation stokes demand for oil. The current oil deficit could worsen as the energy crunch is expected to intensify as winter approaches the northern hemisphere. The C$ eased in early trading amid safe-haven US$ buying and as concerns over China’s economic slow-down. A busy day on the economic front for Canada with BOC Business outlook survey, BOC Lane speaking, Cad Housing starts as well as Canadian & Foreign Portfolio investment data today. Strengthening energy prices and the prospect of higher Cad interest rates into 2022 should provide C$ a core underlying support. Support resets to 1.2355, if breached look for 1.2298 (Jul 6th) next, while resistance lowers to 1.2460.

Euro under pressure below 1.1600 amid safe-have US$ buying. On the weekend ECB President Lagarde reiterated that they see inflation as being “largely transitory” and the ECB remains committed to keeping favourable financing conditions. The ECB’s dovish outlook alongside a rising risk-off sentiment will likely keep pressure on the Euro with the potential for another retest of the low 1.15’s. Focus will remain on US Treasury yields, oil prices and growing economic concerns for China for Euro direction. Support holds at 1.1550, while resistance remains at 1.1640.

EURGBP is flat but with the ECB dovish tone and the BoE shift towards its first-rate hike since covid, will keep pressure on Euro. Support holds at .8460 (1.1820) while resistance holds .8580 (1.1655).

GBP holds steady above 1.37 despite a strengthening US$. Hawkish Fed expectations, rising US Treasury yields and growing UK supply chain concerns will likely keep pressure on the pound in the short term. BOE Baily said that monetary policy cannot solve supply-side problems, while the Brexit Ministers said there is still a gap between the EU/UK and asks for more concessions. Expectations of a rate hike in the UK by as soon as December will support the pound med-term. Support holds at 1.3685 and while resistance resets to 1.3760, if breached look for 1.3846 (Sept 16th) next.