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How Hawkish Will the BoC be if it Hikes Rates Amidst the Turmoil?

Bob Mason
Geo-political risk, private sector PMI numbers and BoC monetary policy all in focus on a busier day for the markets.

Earlier in the Day:

It was another quiet session on the data front, with no material stats released through the Asian session to provide some respite from the slide in market risk appetite across the global financial markets and it’s not going to get much better on the data front for the rest of the week, with stats limited to September trade figures out of New Zealand on Thursday and inflation numbers out of Japan on Friday.

The overnight sell-off in the U.S equity markets and the EU Commission’s rejection of the Italian budget that comes at a time when the U.S President is being forced to rethink Middle East policy following the Kashoggi murder, which has certainly made things interesting with some time left before the mid-term election chatter begins to build.

In the currency markets, the Aussie Dollar was clinging on to $0.70 levels, up 0.10% to $0.7093 at the time of writing, while the Kiwi Dollar was up just 0.06% to $0.6555. For the Japanese Yen, it’s a slow start to the day, with the Yen down 0.07% to ¥112.52 against the U.S Dollar, with some upside to be expected through the day should sentiment fail to shift, the market bears still out in force in spite of a mixed bag in the equity markets this morning.

In the equity markets, in was a mixed start to the day, with the Hang Seng and CSI300 finding support early on, the pair up 0.07% and by 0.46% respectively at the time of writing, whilst the sell-off continued elsewhere, the Nikkei and ASX200 both down by 0.15%.

The Day Ahead:

For the EUR, there’s finally some data for the markets to dig into, with October’s prelim private sector PMI numbers scheduled for release ahead of the ECB’s monetary policy decision and press conference tomorrow. We can expect some EUR sensitivity to the numbers, particularly if inflationary pressures remain subdued and new orders weaken.

Outside of the numbers, there’s the Italian coalition government’s rejected budget to consider, with Populist Party chatter likely to influence through the day, while market risk sentiment and noise from the Oval Office will also need to be considered as the U.S looks to handle Kashoggi’s murder on the world stage.

At the time of writing, the EUR was down 0.03% to $1.1467, today’s stats and geo-political risk the key drivers.

For the Pound, economic data is limited to gross mortgage approvals that will likely be brushed aside by the markets, with Brexit taking centre stage, though things are far from settled on Ireland and negotiations are likely to extend through next month. Talks of a possible leadership challenge at the backbenchers 1922 Committee meeting later today have faced some resistance that should ease the PM’s pain as she faces off with critics, with few likely to be willing to step forward to take on the task of wrapping up a Brexit deal with the EU, which should provide some support for the Pound.

At the time of writing, the Pound was down 0.02% to $1.2980, with Brexit the key driver.

Across the Pond, economic data scheduled for release through the day includes October’s prelim private sector PMI numbers and September new home sales figures.

While a forecasted uptick in service sector activity and steady activity in the manufacturing sector will be considered positives for the Dollar, another set of housing sector weak numbers could weigh, following last week’s disappointing numbers, though geo-political risk factors may well overshadow the stats, particularly if there’s a decision on how to proceed with the Saudis, who just delivered Trump with a timely statement on oil production that contributed to the slide in crude oil prices on Tuesday.

FOMC members Bullard, Mester and Bostic are scheduled to speak, which could provide some Dollar weakness should Bostic’s call for a hold on policy normalization be echoed by his peers.

At the time of writing, the Dollar Spot Index was up 0.02% to 95.978.

For the Loonie, its all eyes on the Bank of Canada, which is widely expected to hike rates later today. With a rate hike baked into the Loonie, the BoC’s forward guidance will be key and, when considering the ongoing trade war between the U.S and China and downward revisions to global growth forecasts, pointing to further rate hikes at the start of next year may be a little too hawkish. Throw in the slide in oil prices and there may not be too much upside later today.

The Loonie up 0.02% to C$1.3083 against the U.S Dollar at the time of writing, the BoC the key driver through the day.

This article was originally posted on FX Empire

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