OVERNIGHT MARKET SUMMARY
The U.S. dollar index, which measures the greenback’s performance against a basket of its major rivals, drifted further off of last week’s 10-week high overnight. The greenback has succumbed to some profit taking after four-straight weeks of gains and as investors square up their books ahead of today’s FOMC meeting minutes and Friday’s CPI and retail sales data. Market expectations for a bold tax reform deal in Washington have also taken a hit amid an escalating Twitter war between President Trump and influential Senate Republican, Bob Corker. The increasing sense that the GOP tax plan will face an uphill battle on Capitol Hill will likely undermine a source of recent support for the dollar.
The euro rose to a two-week high after a speech by Cataluña’s leader late yesterday that stopped short of formally declaring independence from the federal government of Spain. The much-anticipated speech called for dialogue and negotiation with Madrid, which many investors saw as a more market-friendly position for the head of the region that earlier this month voted for independence from Spain in violence-marred referendum.
The Japanese yen firmed against the greenback as moderating Treasury bond yields dented the appeal of the greenback. The move higher in the yen came despite buoyant global financial markets, which saw the DOW hit another all-time high yesterday and emerging market equities rise to their highest level in six years overnight.
The Canadian dollar firmed further off of last week’s one-month trough as crude oil and commodities in general added to this week’s gains. U.S-traded crude jumped by nearly two percent the previous session and held just above $51/barrel again this morning. The Canadian dollar continues to draw support from last Friday’s solid employment figures, which have kept alive expectations for one additional interest rate increase from the BOC by December.
USD: The dollar index slipped further off of last week’s highs as investors continued to take some money off of the table after four-straight weeks of gains for the dollar index. This afternoon’s minutes from the Fed’s September 20th FOMC policy meeting will headline the day’s events. At last month’s meeting, the Fed made no changes to borrowing costs but did signal that it was still looking at a possible third increase in rates this year in December, even if inflation remains stubbornly low. Further discussion of higher rates, even absent any major uptick in inflation would likely support the dollar. Investors, which had focused more in European political risk over recent weeks, turned their attention back to the dysfunction in Washington amid an escalating Twitter battle between President Donald Trump and the head of the Senate Foreign Relations Committee, Bob Corker. With such a narrow margin of Republican control of the Senate, the President’s spats with influential senators could easily derail any nascent progress on tax reform.
EUR: The euro rose to a two-week high overnight after a speech late yesterday by the leader of Spain’s Cataluña province assuaged some worries about a constitutional showdown with Madrid. Carles Puigdemont, the regional leader of Spain’s richest region, said yesterday that the October 1 referendum had given him an “independence mandate”, but stopped short of declaring independence from the federal government of Spain. His openness to negotiations with Madrid struck a somewhat more consolatory tone than many had feared and resulted in a bit of a relief rally in the single currency, which had suffered from an increase in its political risk premium over recent weeks
EM: Emerging market assets from Mexico, Brazil, India, Turkey and South Africa were in rally mode overnight, benefiting from the general pullback in the greenback and from the buoyant mood in global financial markets. The rise in global equities and commodities helped drive demand for higher risk assets, as did news yesterday that the IMF had increased its forecasts for global economic growth in both 2017 and 2018.
AUD: The Aussie, which had fallen to a three-month low last week, firmed modestly overnight following an upbeat reading of Australian consumer confidence in October to its highest level all year. The news was a welcomed bit of positive economic data for the Aussie, which has struggled against a backdrop of rising U.S. yields and expectations that the Reserve Bank of Australia will not likely raise its key cash rate until sometime in the second half of next year.
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