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USD Dips Ahead of Fed Decision at 2pm ET

Published November 2, 2016
  • USDCAD is trading near the lower end of its recent, tight range around the 1.34 handle, with spot moving into the mid 1.33's this morning
  • Oil prices continue to trend lower as WTI breaks below $46/bbl; we are seeing the usually strong correlation between oil and CAD showing signs of breaking down in the short term 
  • Yesterday's API inventory report showed an unexpectedly large build in US crude inventories last week – 9.3 barrels compared with forecasts for a 1m build…
  • …obviously, this caught the attention of the market with consideration now turning to today's official EIA data due at 1030am ET
  • Expectations are for the data to show a modest 1m barrel rise in inventories; however, the market is certainly on edge and likely prepared for a larger build than anticipated
  • The US releases ADP private payrolls for September which came in at 146k compared with 165k forecast
  • As unofficial jobs data goes, there is usually a relatively spurious correlation between ADP and the official Non-Farm Payroll data which is released this Friday…
  • …but the market seems to have completely ignored the ADP data thus far with the Fed decision and EIA figures garnering more interest
  • The Fed is widely expected to hold rates today and deliver a statement that ever so gently attunes the market to envisage a December hike…
  • …employment trends have been strong, Q3 GDP was above forecast, manufacturing activity is expanding steadily…
  • …the only identifiable concern is that business investment/capex has remained weak which means that innovation and productivity are likely to trend sideways/downwards
  • This, in the long run, can be a drag on profits, wages and thus potentially inflation as well
  • Aside from that, the US economy is sitting pretty relative to its G10 peers and we suspect it can absorb a rate hike and a slightly stronger US dollar without any issues

Charts: (1) USDCAD and US-CA 2-year spread both moving higher. (2) Seasonality Chart OCT – MAR last five years shows USD +5.7%. (3) Fed rate hike odds. (3) Economic Calendar.