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Kiwi bulls charged during the RBNZ decision as the central bank predicted that the economy would hit its inflation target earlier than previous expected and probably hike interest rates sooner, too.

On the flip side, the pound continued to tread lower throughout the day after the EU Parliament pointed out major unresolved issues on citizen’s rights after Brexit.

  • Canadian housing starts up from 219K to 223K vs. 211K forecast
  • Canadian building permits rebounded by 3.8% in September
  • U.S. crude oil inventories rose by 2.2M barrels vs. projected 2.5M drop
  • RBNZ kept interest rates on hold at 1.75% as expected
  • RBNZ: NZ to hit inflation target three quarters earlier than initial forecast
  • RBNZ projects rate hike by Q2 2019, a quarter earlier than previous estimate
  • Acting RBNZ Gov Spencer: Proposed gov’t changes would have little effect on policy

Major Events/Reports

U.S. tax plan jitters

Bond yields and the dollar tossed and turned during the New York session as the lack of top-tier data kept market watchers extra sensitive to tax plan updates.

As my buddy Forex Gump noted in his Forex Market Weekly Outlook, Senate is expected to unveil their version of the tax bill this week and sources are saying that there are significant differences with the House version.

In particular, senators are looking at a different approach to corporate taxes, deductions for state and local taxes, and the estate tax on inherited assets. This comes after rumors that Senate is considering a one-year delay before implementing proposed tax cuts.

Nonetheless, U.S. equity indices managed to close in the green:

  • Dow 30 index is up 6.13 points to 23,563.36 (+0.03%)
  • S&P 500 index is up 3.74 points to 2,594.38 (+0.14%)
  • Nasdaq is up 21.34 points to 6,789.12 (+0.32%)

Bond yields also ended in positive territory for the day:

  • U.S. 10-year yield is up to 2.322% (+0.22%)
  • U.S. 5-year yield is up to 2.008% (+0.31%)
  • U.S. 2-year yield is up to 1.649% (+1.25%)

EU to delay post-Brexit talks?

During a pow-wow among ambassadors from 27 EU states, envoys brought up the possibility of delaying into next year the launch of talks with London on a post-Brexit relationship.

This would likely keep U.K. businesses in limbo for much longer until a bit more clarity on the transition period is seen. Ambassadors were supposed to discuss how this transition period would go about, but the talks were sidetracked by how the U.K. would likely fail to meet EU conditions for opening future negotiations.

An EU official familiar with the matter mentioned that there are still unresolved issues on citizen’s rights during the post-Brexit period, which is part of the three first-phase issues that May’s government should address before proceeding with talks.

“While the transition and future relationship were formally on the agenda, what ambassadors focused very much on was real concern that the UK does not realize that the EU27 are deadly serious about the need to meet the ‘sufficient progress’ mark on the three first-phase issues.”

The source went on to say that the lack of sufficient progress on these issues could lead to talks being pushed back into 2018.

RBNZ interest rate decision

Before U.S. traders called it a night, the RBNZ grabbed the spotlight and announced its decision to keep interest rates unchanged at 1.75% as expected.

But far from being a non-event, the monetary policy statement led to big moves for the Kiwi as central bankers made adjustments in their inflation forecasts. They now see annual inflation rising to 1.8% in the December quarter from their earlier forecast of 1.3% and dipping to 1.5% in the March 2018 quarter from their previous estimate of 0.7%.

Apart from that, policymakers expect the OCR to reach 1.9% in June 2019, three months earlier than their initial forecast. They project a full rate increase by March 2020 and the key rate could reach 2.3% by December of the same year.

Although Acting Governor Spencer reiterated that “monetary policy will remain accommodative for a considerable period,” he also cautioned:

“[I]n the current environment, additional stimulus would risk generating unnecessary volatility in the economy, while a premature tightening would risk undermining growth and could cause headline inflation to settle below the midpoint of the target range.”

RBNZ officials also seemed happy about the Kiwi’s depreciation in the recent months, downgrading their TWI forecasts from 77.9 to 73.5 in the fourth quarter. Spencer noted:

“The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth.”

All in all, the statement was considered less dovish than expected, as Spencer also assured that proposed government changes to the central bank mandate would have little effect on policy and economic conditions.

Major Market Mover(s):

NZD

Thanks to a shift in the RBNZ’s tone to a more upbeat one, the Kiwi was able to rebound against its peers and hold on to its gains.

NZD/USD recovered from a low of .6914 to a high of .6974, NZD/JPY climbed from 78.58 to a high of 79.40, EUR/NZD slid to a low of 1.6629, and GBP/NZD is down to 1.8812.

GBP

The pound was nearly non-stop in its drop as the idea of delaying Brexit talks meant more uncertainty for U.K. businesses.

GBP/USD sank to a low of 1.3086 before pulling up to 1.3100, GBP/JPY hit a low of 148.56, EUR/GBP is up to .8838, and GBP/AUD fell to a low of .7053.

Watch Out For:

  • 12:30 am GMT: Australian home loans (2.5% expected, 1.0% previous)
  • 1:30 am GMT: Chinese CPI y/y (rise from 1.6% to 1.8% expected)
  • 1:30 am GMT: Chinese PPI y/y (dip from 6.9% to 6.6% expected)
  • 5:00 am GMT: Japanese Economy Watchers Sentiment index (drop from 51.3 to 50.7 expected)