The Morning Update

Tuesday September 19th, 2023

Written by:
Paul Harrison

The USD eases, oil prices are up, while equity markets and US yields are mixed with rate concerns ahead of the central bank's rate decision. Currency markets remain sidelined, Brent crude tests $95 per barrel for the first time since November and equity markets remain cautious as investors brace for major central bank meetings this week. Soaring oil prices are adding to concerns about inflation as markets await the Federal Reserve interest rate decision on Wednesday, the Swiss National Bank and Bank of England on Thursday, and the Bank of Japan's on Friday. In focus today, we saw EUR inflation revised slightly down, later today the US Housing Starts, CAD CPI, and BoC Kozicki speech will help provide intraday direction to currency markets.

In other news. US car workers threaten to expand Detroit strikes. Central banks must keep rates high until inflation is tamed, says OECD. Canada's PM Trudeau says 'credible allegations' link India to killing of Sikh leader in Canada, India dismisses accusation as 'absurd' as top diplomats expelled. The Fed set to hold rates but leave tightening in play-FT. Hungary raises fresh objections to Sweden's NATO bid. Japan's central bank will keep stimulus for now as risks grow. China's BYD rides on partnerships to expand EV sales in Southeast Asia.

In currency markets. Currency markets remain relatively stable as investors remain on the sidelines ahead of the Fed's interest rate decision on Wednesday. Petro-currencies extend gains as Brent crude tests $95 per barrel as Russia and Saudi Arabia keep supplies tight. CNY & Asian currencies are flat on average vs. USD. Trading currencies are mixed with JPY & CHF down 0.1%, while SEK & ZAR are up 0.2%, AUD, MXN & NZD strengthened 0.3%, and NOK rallied 0.45% vs. USD.

In commodity markets. Brent Crude firms 0.45%, Natural Gas is up 0.1%, Gold gains 0.15%, Copper prices fall 1.1%, Lumber prices are flat, and Wheat slips 0.45%.

CAD extends gains, testing a fresh four-week high as oil prices continue to strengthen to fresh 2023 highs, coupled with increasing optimism for growth following China's stepping up its stimulus efforts. The focus will be on today's CAD consumer price index y/y August which is expected to see inflation accelerating to 3.8% from July at 3.3%. Earlier in the month we saw the BoC keep rates on hold, but they did say they could raise borrowing costs again should inflationary pressures persist. The impact of the inflationary report may be subdued as we expect investors to remain sidelined ahead of the Fed's decision on Wednesday.

EURCAD weakens in early trading as CAD continues to extend gains on strengthening oil prices providing an underlying support to the loonie.

EUR remains capped at 1.0700 amid a cautious risk tone ahead of the Feds rate decision. Euro remains trapped within a narrowing trading range ahead of the Fed and BoE interest rate decisions this week. The downward revision to the Eurozone final inflation data and the increasingly dovish stance have seen the Euro lose steam in the last two months since hitting a 15-month high. According to the most recent weekly data, markets have cut their bullish position in the Euro to its smallest level in 10 months. We expect investors to remain sidelined ahead of the Federal Reserve's interest rate decision to be announced on Wednesday.

GBPEUR holds steady in early trading as currency markets remain cautious ahead of the Fed & BoE interest rate decisions tomorrow and Thursday.

GBP stalls near five-month lows below 1.2400 ahead of UK CPI & the Fed's decision on Wednesday. The pound continues under pressure and UK growth continues to slow more than expected after strikes and poor weather weighed on output in July. Investors are cautious heading into Wednesday's UK CPI y/y August is expected to rise to 7.1%, up from 6.8% in July. The BoE is expected to hike by 25bps taking rates to 15-year highs, as it attempts to balance surging inflation rates while attempting to avoid tipping to country into recession. We expect the pound to hold on the back foot ahead of two days of key data releases and central bank interest rate decisions.