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The Loonie was the star of the show thanks to the BOC’s decision to hike interest rates, which took several market watchers by surprise. The U.S. dollar took a break from its slide and raked in some intraday gains on an extension of the debt limit deadline.

  • BOC increased interest rates from 0.75% to 1.00% instead of staying put
  • BOC: Recent economic data has been stronger than expected
  • BOC: Consumer spending robust, widespread strength in business investment and exports
  • BOC: Wage and price pressures still subdued, future policy decisions not pre-determined
  • Canadian trade deficit narrowed from 3.8B CAD to 3.0B CAD vs. 3.2B CAD estimate
  • Canadian labor productivity dipped 0.1% in Q2 vs. projected 0.9% gain
  • U.S. trade deficit widened from $43.5B to $43.7B vs. projected $44.6B shortfall
  • U.S. final services PMI downgraded from 56.9 to 56.0
  • U.S. ISM non-manufacturing PMI rose from 53.9 to 55.3 vs. 55.8 forecast
  • Fed Beige Book: Employment growth slowed, limited wage growth in most districts
  • U.S. lawmakers agreed to extend debt limit to December 15 to make way for Harvey disaster bill

Major Events/Reports

BOC hike and upbeat Canadian data

Surprise, surprise! The Bank of Canada decided to hike interest rates by 0.25% for the second time this year even as most market participants expected policymakers to sit on their hands for the time being.

According to their official statement, BOC officials are seeing stronger than expected economic data lately, and this was backed up by the latest batch of figures from Canada.

The trade deficit narrowed from 3.8 billion CAD to 3.0 billion CAD versus the projected 3.2 billion shortfall, even as weaker price levels weighed on both imports and exports. Labor productivity declined 0.1% for the previous quarter instead of gaining by 0.9%, putting additional upside pressure on hiring and wages.

The BOC also highlighted how consumer spending has been robust and that widespread gains are seen in business investment and exports. They did say that they’re expecting moderation in terms of overall economic growth for the latter half of the year, adding that wages and price pressures remain subdued.

Still, Loonie bulls appear to be counting on another interest rate hike before the end of the year as the BOC also mentioned:

“Future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation. Particular focus will be given to the evolution of the economy’s potential, and to labour market conditions.”

This suggests that the upcoming Canadian jobs release could garner a lot of market attention as this could make or break future hike speculations.

Not-so-downbeat Beige Book

After this week’s slew of dovish remarks from FOMC members, dollar traders had been bracing themselves for more downbeat comments in the Fed Beige Book.

However, the report indicated that majority of districts saw an increase in consumer spending, as well as manufacturing and construction activity. But just as FOMC member Brainard pointed out in her testimony earlier this week, wage growth has been lagging despite tightening labor market conditions. In fact, the report also indicated that employment gains slowed, ranging from a slight to modest pace across the Fed districts.

U.S. data wasn’t all that cheery, too, as the trade deficit widened while services PMIs disappointed. The shortfall for July came in at $43.7 billion versus the earlier $43.5 billion but was still better than the projected $44.6 billion deficit. Components revealed that exports dipped $0.6 billion from the previous month while imports fell $0.4 billion.

The ISM non-manufacturing PMI climbed from 53.9 to 55.3 to reflect a faster pace of industry growth but this fell short of estimates at 55.8. The final services PMI calculated by Markit was downgraded from 56.9 to 56.0 for August.

U.S. lawmakers agree on debt limit extension

Finally Democrats and Republicans found something they could agree on! Lawmakers reached a deal to extend the debt limit for three more months in order to make room for the disaster bill related to Hurricane Harvey relief efforts.

The cherry on top is that U.S. President Trump himself expressed his agreement to this deal, citing that this would help avert a government shutdown and immediately provide much-needed aid to Hurricane Harvey victims. The Donald told reporters:

“We have an extension, which will go out to December 15th. That will include debt ceiling, that will include short-term spending for the coming fiscal year, and it will include Harvey. The amount of money to be determined.”

In case you missed my buddy Forex Gump’s crash course on the debt limit and what a government shutdown could mean for the markets, lemme tell you that this puts the government’s ability to borrow money or pay its bills at risk, thereby affecting the U.S. credit rating negatively and likely being very bearish for the dollar.

With the latest deal, the House approved nearly $8 billion in initial emergency aid for relief and rebuilding, which comprises $7.4 billion for the Federal Emergency Management Agency and $450 million for the Small Business Administration.

Major Market Mover(s):

CAD

The BOC hike gave the Canadian a strong boost across the board, on top of the pickup in crude oil prices in anticipation of better than expected EIA inventory data.

NZD/CAD is down from .8952 to .8792 (-1.76%), USD/CAD tumbled from 1.2376 to 1.2222 (-1.24%), AUD/CAD is down to .9771 (-1.22%), and EUR/CAD fell to 1.4566 (-1.21%).

USD

The dollar pulled up from its recent dive, buoyed by several bullish factors discussed above and also FOMC member Fischer’s resignation due to personal reasons.

USD/CHF recovered from .9553 to .9567 (+0.15%), USD/JPY is up to 109.29 (+0.44%), NZD/USD slipped from .7233 to .7194 (-0.53%), and AUD/USD is holding steady at .7995 (-0.01%).

 

Watch Out For:

  • 12:30 am GMT: Australia AIG construction index (60.5 previous)
  • 2:30 am GMT: Australia retail sales m/m (0.2% expected, 0.3% previous)
  • 2:30 am GMT: Australia trade balance (0.93B AUD expected, 0.86B AUD previous)
  • 6:00 am GMT: Japanese leading indicators (fall from 105.9% to 105.2% expected)