Dollar strengthens slightly
It is once again a pretty quiet start to things in Europe today, with some very slight movements in favour of the USD. I am unsure whether we are seeing traders starting to get back behind the dollar ahead of the Federal Reserve meeting next week but, as we stated on Friday, I really do think that the markets are mispricing the chances of a rate hike by the Federal Reserve in December. The probability of a beginning of the normalisation process in December is currently sitting at a 32.3% which gives us the opportunity for further USD strength as we move through the end of the year.
Commodity currencies back in the crosshairs
The heaviest falls have been reserved for currencies in Asia and the Pacific given the emerging market focus that traders still have heading into 2016. Within the G10, the biggest move has been in the NZD following the first fall in dairy prices in five months.
Commodity prices, particularly those in agriculture, are very difficult to forecast at the moment given the huge amount of oversupply that we are seeing throughout the space. Demand may be starting to normalise throughout emerging markets, though the huge supply overhang will still pressure commodities in the short-term. We must also look at the correlation between the USD and commodities, and the strength of the USD has coincided with the fall in commodity values. If you believe that the dollar is undervalued at these levels then you have to expect that commodities have further weakness ahead of them.
Japan hurt by currency movements elsewhere
The weakness globally is a pain for countries with a strong current account surplus – stronger exports than imports – and that has been shown succinctly in the overnight Japanese trade numbers. Exports rose by 0.6% – the slowest pace in over a year – as trade with China, Indonesia, India, Malaysia and Thailand all declined on the month. This basically wiped out any gains that had been seen in exports to Europe or the United States.
Stocks are higher and the yen weaker as traders once again reprice in thoughts around additional stimulus for the Japanese economy. Of course, the countries that have seen a decline in trade from Japan have seen weaknesses in their currency versus the yen in recent months – the effects of a currency war are still being felt.
The Day Ahead
As for today, it is expected to be a quiet session once more, with the Bank of Canada decision at 3pm BST the most important macro decision of the day. Central bankers of every stripe have been keen to emphasise their willingness to act if needs be seemingly forever and that should continue from the BOC today. The election of Trudeau yesterday has taken some of the heat off the central bank and they will not be unhappy with the slight sell-off in the CAD that took place through the US session yesterday.
We also receive the latest public borrowing figures from the UK at 09.30.