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Bank of Canada, FOMC and political surprises rock the markets

It’s been a big day for trading in world markets, particularly currencies, with a lot of twists and turns plus big surprises. 

The day kicked off with a surprise interest rate hike in Canada that sent the Loonie skyrocketing. The Bank of Canada has been talking hawkishly since the spring and CAD had been climbing, but the timing of this year’s second hike came a lot faster than many, including me had expected. I had been thinking Governor Poloz would hold rates and signal a second hike later in the year. Instead, the Bank of Canada pulled the trigger on a second hike now, likely in response to last week’s spectacular Canadian GDP report. In the statement the Bank indicated the economy has been doing well but that it will be monitoring the impact of rate hikes on consumers particularly with debt levels running high and house sales slowing in Toronto. 

It also was a roller coaster day for the US Dollar. The greenback was knocked down in the morning by the CAD rally and then by the news that FOMC Vice Chair intends to resign on or about October 13th, well ahead of the June 2018 end to his term. Governor Fischer had been the most neutral to hawkish among the Big 3 FOMC members so his departure was seen as a potentially dovish shift in the short term. It also relaunched questions of whether Fed Chair Yellen will stick around after her term ends in January 2018 and added to the economic uncertainties swirling around the US this fall. 

This all turned on a dime in the afternoon, as President Trump and Democrat congressional leaders came up with a deal to provide hurricane assistance, raise the debt limit and keep the US government running until December 15th.  This kicking of the can down the road for a couple of months has opened a window for the Fed to start normalizing its balance sheet in September, but makes a third US rate hike this year unlikely. It’s too early to say if this leaves the door to a longer term deal, or leaves the door open to a government shutdown over Christmas.  President Trump has several spots to fill at the Fed so the makeup of the board could be very different in a few months’ time. 

Stock markets were mixed on the day. The FTSE and the S&P/TSX declined by 0.2% weighed down by rallies in GBP and CAD. US indices gained 0.25% on the day while the Dax rallied 0.75%. The easing of domestic political risk in the US for now dragged on defensive plays like gold and JPY which could boost the Nikkei today. 

Australian stocks have also been bouncing back, benefitting from a 1.0% gain in WTI crude oil and a 0.8% advance in the copper price putting a tailwind behind energy and metal producing stocks. Australian markets may remain active today around Australian construction PMI, retail sales and trade reports. 

Just oil has been reversing last week’s selloff, gasoline has been reversing last week’s rally falling 1.5% today. Late in the day, API inventories showed a much more moderate increase in oil stockpiles and a smaller decline in gasoline inventories compared with the numbers expected for tomorrow’s DOE reports. Although the inventory numbers may be distorted for the next several weeks, significant surprises could still have a significant impact on trading. 


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