The Morning Update

Thursday November 2nd, 2023

Written by:
Paul Harrison

The USD weakens, oil prices rebound, equity markets gain, and US yields ease after the US Fed chair's comments. Currency markets rebounded, the USD weakened, while equity markets rallied, and US yields eased as investors reacted to the possible peak of the Federal Reserve's historic tightening campaign. The Fed kept interest rates on hold yesterday at 5.25%, the highest level since 2001, as part of their strategy to control stubbornly high inflation levels. Federal Reserve Chairman Powell indicated policymakers could raise interest rates when they meet again in December, he also indicated that officials may be done raising interest rates beyond 2023. Wednesday's US jobs data showed a mixed picture, with more job openings than forecast, while ADP's private payrolls figures showed fewer new roles than anticipated. In focus today the BoE monetary policy report, BoE Governor Bailey's Speech, US Initial Jobless Claims, and Nonfarm Productivity will help provide some intraday direction to currency markets.

In other news. Israeli army at 'gates of Gaza City' as Biden calls for pause in fighting-FT. Egypt allows the first evacuee departures from Gaza. The S&P 500 futures tick higher as attention turns from the Fed to the latest earnings reports. Shell posts a $6.2 billion third-quarter profit, announcing a $3.5 billion share buyback. The Bank of England set to keep rates at 15-year high despite slowdown signs. Eurozone factory turndown deepened in October - PMI. German Lufthansa is upbeat on travel demand as Q3 beats estimates. German manufacturing remains under pressure in October-PMI.

In currency news. The USD weakens as investors see US rates peaking. China's onshore yuan steadies as the USD softens, and offshore yuan firms. Commodity currencies rebound as risk mood brightens. CNY is flat, while Asian currencies gain 0.25% on average vs USD. Trading currencies rebounded as MXN & NOK firmed 0.35%, JPY, ZAR, SEK & CHF up 0.5%, AUD strengthened 0.8%, and NZD rallied 1% vs USD.

In commodity markets. Oil prices surged 1.9%, Natural Gas prices weakened by 1.25%, Gold prices strengthened by 0.45%, Silver prices rallied by 1.75%, Copper prices gained by 0.85%, Wheat prices slipped by 0.4%, and Soybean prices are up by 0.7%.

CAD extends gains vs USD after Fed Chair Powell suggested US interest rates will see another rate hike in December which should be the peak for US interest rates. Improving risk sentiment, and rallying commodity prices combined to help support the loonie in early trading which rebounded from October 2022 lows to retest 1.3800 ahead of the North American open. In the bigger picture, we anticipate the BoC rates have peaked, domestic growth has stalled, and the continuing concerns from geopolitical tensions will temper improving risk sentiment which we expect will keep CAD under pressure in Q4/23. We anticipate investors will be sidelined awaiting Friday's key CAD & US employment data.

EURCAD rebounds and extends gains to fresh 9-week highs as recession fears for Canada, ongoing China economic concerns, and geopolitical concerns are expected to keep the loonie on the back foot.

EUR rebounds through 1.0600 as the USD selloff continues. Euro gathered some bullish momentum, rallying off 1.0520 lows through 1.0600 in early trading after the Fed chair suggested US interest rates will peak in December. Domestically manufacturing PMI data was mixed with Germany & France beating expectations, while Spain & Italy missed expectations and the Eurozone itself marginally beat expectations as well. Today sees some mid-tier US economic releases which should have limited impact on markets, with investors sitting on the sidelines waiting for Friday's key US Nonfarm payroll data.

GBPEUR holds near 6-month lows ahead of today's BoE interest rate decision and the BoE Governors statement.

GBP steadies below 1.2200 despite the weaker USD as investors are cautious ahead of BoE's Super Thursday. The pound bounced off weekly lows of 1.2100 after the Fed indicated that its domestic interest rates are expected to peak in December. The Bank of England is expected to keep interest rates steady at 5.25%, holding at 15-year highs. BoE Governor Bailey will hold a press conference to deliver the Monetary policy report and will take questions from the press. We anticipate Governor Bailey to adopt a more dovish tone in light of the weakening economic outlook and softer inflation data.