FX Insights 10/30 - 11/3

The Federal Reserve kept rates unchanged, although firmly leaving a hike in December on the table. They noted that “economic growth was rising at a solid rate” and that the pace of economic developments does warrant a gradual rise in rates. Friday’s labor report appeared to support this view as the economy continues to head towards maximum employment. The US created 261,000 jobs in October while the prior month also saw a 90,000 upward revision. Unemployment fell to 4.1% but the one lingering concern is the absence of wage inflation. Despite this however, consumer confidence is at 17 year highs. Helping to overshadow the Fed announcement was President Trump’s nomination of Fed Governor Jerome Powell as the next Fed Chair. Powell will likely continue Yellen’s path of gradual policy normalization but appears more sympathetic to deregulation given his background in the private sector. Powell will soon inherit the delicate task of overseeing an economy which has managed growth yet eluded inflation.

House Republicans released the first draft of the much anticipated tax bill last Thursday, with a hopeful Thanksgiving deadline to pass the bill. Among the major provisions is a permanent reduction in the corporate tax rate to 20% from 35%. The dollar wavered in response to the higher than expected 12% tax on foreign profits which dampens the prospects for the repatriation of up to $2 trillion in overseas assets. The bill has already been met with opposition from several Republican representatives and lobbyists who oppose deductions on state and local tax deductions and reductions in mortgage interest deductions. Questions also remain over whether the bill’s cost will remain under the $1.5 trillion allowed under Senate reconciliation rules. The progress on the tax reforms will remain a focal point for markets this week as the US sees no major economic releases.

The Canadian dollar (CAD) seesawed on the back of economic data released throughout the week. GDP released for August showed a -0.1% contraction, the first such occurrence in 1 year, led by declines in manufacturing, mining, and energy. Friday’s labor report noted that the economy was shown to have added 35,000 jobs beating estimates of 15,000. While the economy is expected to moderate after peaking at a 4.5% annualized growth rate in the second quarter, the present strength in labor markets should help alleviate concerns of a sharp downturn. A data point that is worthy of noting was the expansion of the trade deficit. The central bank has highlighted their concern over the adverse impact of a strengthening CAD on the economy and the expanding trade deficit may be an indicator that the CAD strength is making exports less competitive.

There was little news out of the euro-zone last week as the Bank of England (BoE) took center stage for markets. The BoE raised its benchmark rate for the first time in 11 years by 25bp to .50%. Markets saw the accompanying statement as dovish since the bank removed its statement that rates may need to raise more than markets expect. Now indicating just two more 25bp increases through 2020, the bank expressed concern on Brexit uncertainties and reiterated a willingness to respond should conditions change. The cautious overtones sent the pound sharply lower for its worst day in months. The UK sees no major economic releases this week giving markets time to digest the BoE’s outlook in anticipation of major releases next week.

In Asia, manufacturing purchasing manager indices out of China last week showed a slowdown in the pace of production as well as steady job losses and reduced confidence in the 12 month outlook. China sees further data released this week on trade and inflation which may influence local exchange rates. Meanwhile, PMI surveys in India showed a strong services sector recovering from the new goods and services tax and a less robust manufacturing sector. Moreover, employment growth and price pressures are strengthening suggesting the Reserve Bank of India will not likely make any additional rate cuts soon.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast

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