FX Insights 11/13 - 11/17

The US dollar found itself under pressure last week as tax reform hit speed bumps on its way through congress. The house voted and passed its version of the bill as expected, but a senate vote was delayed amidst last minute changes. Senate passage of the bill is expected to be much trickier as Republicans only maintain a marginal 52-48 majority and cannot afford to lose more than 2 votes given no democratic support. On the data side, the US saw encouraging signs of inflation from producer prices although consumer prices remained stagnant. Other releases were mixed as well, with Fed surveys for the New York and Pennsylvania areas coming below expectations but industrial production and retail sales coming in positive. Minutes from the Fed’s last meeting and an early purchasing managers’ index reading for November highlight this week’s data, but neither are expected to be as significant as the developments out of Washington. The result is that the dollar will find itself balancing on a tight rope this week as tax reform progresses.

The euro enjoyed a boost last Tuesday as growth in Germany, the region’s biggest economy, topped forecasts at 0.8% in the third quarter. The gains carried the euro through the rest of the week as broader euro zone growth marked a solid but expected 0.6% pace while inflation held steady. Economic fundamentals have been trending stronger for the Eurozone but gains in the single currency have been checked by occasional shows of caution from the ECB. Minutes for the central bank’s October meeting released this Thursday could reiterate some concerns over inflation and a strengthening euro. Purchasing managers indices released the same day will provide an early indicator of the health of the private sector heading into the close of the fourth quarter.

The pound opened last week sharply lower amidst stirring reports of a growing lack of confidence amongst members of parliament in Prime Minister, Theresa May. On the Brexit front several Conservative party leaders postured towards a hard Brexit, reviving the specter of a no-deal exit. Once digested, the political headlines gave way to positive economic reports in the following days which helped the pound claw back its early losses. While inflation seems to be showing a peak steadying at 3%, the news may be a blessing in disguise given that earnings have been outpaced by price growth over the past year. Yet, in spite of the squeeze retail sales last Thursday bested expectations, showing resiliency by British consumers. A strong third quarter GDP print this Thursday would be further welcome news for the pound as nominal growth potentially starts translating to real growth.

A lack of news and a drop in oil prices led the Canadian dollar to drift lower last week against its US counterpart. The only major release for the week was consumer prices which edged up 0.1% on the month. The 1.4% annualized rate is a slowdown from September’s 1.6% increase, following a similar pullback in growth which together shows a cooling off in the hot economy, validating the Bank of Canada’s assessment to hold off increasing rates after two consecutive hikes. This Thursday, retail sales for September are expected to make a healthy recovery after a surprise decline in August and despite the recent cool down.

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

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