The loonie was shielded by strong oil prices in yesterday’s session and managed to withstand pressure from the greenback, while the drop in oil prices during the latter part of yesterday’s session did little to dent the loonie as the US dollar weakened simultaneously and crude oil prices remain significantly high in broader terms. WTI continues to trade above $83/b this morning while Brent is trading just below $85/b, which means both are trading just off of multiyear highs. A Bank of Canada survey from yesterday indicated Canadian firms see inflation staying high as they suffer from supply-chain bottlenecks and a lack of available workers. 45% of firms anticipated inflation to be above 3% over the next two years, and businesses expect the supply chain issues to last until the second half of 2022. The report adds to the narrative that firms are facing challenges to meet the robust demand as economies have reopened. Today’s data calendar includes no significant releases for Canada, which means all focus will be on broader macro flow and risk sentiment.
Firmer risk sentiment reduced demand for the dollar overnight and led to the DXY index retreating to its lowest levels in two weeks while yields also moderated. Yesterday’s data docket included a contraction of industrial production by 1.3% in September, though the press release that accompanied the report indicated this was mostly due to Hurricane Ida and the sharp decline in auto production. While the output data by itself is unlikely to be meaningful for monetary policy, it does help assuage fears of high inflation. The global data docket is fairly light today, but this scarcity will be somewhat compensated by the numerous central bank speakers. Speeches are due from the Federal Reserve’s Daly, Barkin, Bostic and Waller between 16:00 and 20:00 BST.
GBPUSD advanced towards its highest level in a month as the greenback lost ground this morning amid an improving market mood. Hawkish comments from Bank of England Governor Andrew Bailey over the weekend likely helped to limit losses in the pair in yesterday’s session when the dollar was gaining, as his comments indicated the first step towards policy normalisation is becoming increasingly likely. On the fiscal side, PM Boris Johnson unveiled a £3.9bn plan to drive down carbon emissions from UK homes and offices. Measures include grants for homeowners who replace gas boilers with more eco-friendly heat pumps, and funding to help decarbonise poorer households. The plan is unveiled ahead of the COP26 climate talks starting later this month, which Johnson expects to be “extremely tough”. Looking at today’s calendar, a number of Bank of England speakers will be eyed after the recent hawkishness and ahead of tomorrow’s UK CPI release.
The euro reached fresh highs against the dollar this morning as risk sentiment improved, which allowed the pair to rise to levels last seen in September. Domestically, not much is driving the surge, although on the background monetary headlines are plentiful. Four European Central Bank members told the Financial Times on Monday they would support increasing the share of public sector bond purchases that target debt issued by international bodies such as the EU from the current cap of 10%. This would help the ECB to support financial markets without running into issues with the current rules that bar it from owning more than a third of any nation’s government debt – a level that some say may be reached in the case of Germany and the Netherlands by 2023. Additionally, the tilt towards purchasing more EU debt would cut the EU’s funding costs. The governing council members expect the issue to be raised at the two special council meetings starting in November, where the ECB decides how much support to provide for financial markets from next year. In order for the plan to succeed, it needs a majority out of the council’s 25 members. Today’s calendar is light in terms of data, however markets will focus on the five European Central Bank speeches throughout the day by Rehn, Centeno, Elderson, Panetta and Lane.