In August, Manufacturing Shipments in Canada rebounded after two negative months, rising 0.8%. Jocelyn Paquet, analyst at the National Bank of Canada, explains the rebound won’t be enough to salvage a poor third quarter for factories.
“Manufacturing sales rebounded in August following two lackluster prints in June (-1.5%) and July (-1.3%). The transportation category was the main contributor to the improvement as both the motor vehicles (+2.6%) and aerospace (+3.9%) segments saw healthy increases in shipments.”
“Looking at the data in volume terms, both shipments (+0.6%) and inventories (+0.4%) posted decent gains. Although this should translate into a positive contribution to growth in August from the manufacturing sector, it won’t be enough to salvage what looks like a poor third quarter for Canadian factories.”
“With just one month of data still to come – and September is unlikely to be great due to ripple effects of the GM strike South of the border -, real manufacturing shipments are tracking a 3.3% annualized decline in Q3. While an inventory buildup (+4.0%) in the quarter may provide some offset, ever-expanding stocks could eventually hinder production. Recall that the real inventory-to-shipments ratio now stands at a cyclical high, hardly the harbinger of a ramp up in output.”
Data released today showed Industrial Production dropped 0.4% in September. Analysts at Wells Fargo, point out that while the General Motors strike held down production, manufacturing outside the auto industry continues to slow and suggest that the industrial sector remains under pressure.
“Activity in the industrial sector slowed in September, with total production down 0.4%. The slowdown was broad-based with only a weather-related 1.4% jump in utilities output, as last month tied 2015 as the second warmest September on record. Gains there helped offset some of the slowdown, but weakness in mining and manufacturing weighed on overall activity. Mining production was down 1.3% in September, pushing mining output down 4.4% at an annual rate in Q3; the first quarterly decline in three years.”
“Manufacturing output declined 0.5%, led by a 4.2% drop in motor vehicles & parts production, due to the United Auto Workers (UAW) strike from General Motors (GM)."
“Looking past the GM-related impact, weakness hasn’t just been tied to the auto sector. Manufacturing excluding motor vehicles & parts declined 0.2% in September, suggesting the slowdown in manufacturing continues.”
“As trade tensions persist, the manufacturing sector continues to be under pressure, and headwinds from the trade war and slower global growth will likely continue to weigh on activity.”
Northern Ireland’s Democratic Unionist Party (DUP) Brexit spokesman Sammy Wilson on Thursday said that he will be encouraging other lawmakers in parliament to vote against British Prime Minister Boris Johnson's Brexit deal on Saturday.
Earlier in the day, the DUP in a published statement formally rejected the proposed Brexit deal. "Following confirmation from the Prime Minister that he believes he has secured a "great new deal with the European Union the Democratic Unionist Party will be unable to support these proposals in parliament," the statement read.
The GBP/USD pair inched lower on these comments and was last up 0.12% on the day at 1.2845.
- Pound stabilizes around 1.2850 after sharp moves.
- The Brexit deal now goes to UK Parliament: volatility around GBP’s crosses set to remain elevated.
The GBP/USD pair rose back above 1.2800 after finding support at 1.2750. Price action remains volatile following the Brexit deal. Initially, optimism pushed Cable sharply higher but then, uncertainty about Saturday’s UK Parliament vote weakened the Pound. After sharp moves, GBP/USD is modestly higher for the day, up for the third-day in-a-row, far from the highs.
Brexit deal achieved but the drama is not yet over
Finally, the United Kingdom and the European Union (EU) reached an agreement. Now attention turns to the UK Parliament that will vote on the deal on Saturday. “Brexit is set to continue rocking GBP/USD as the focus moves to Westminster. There are four different scenarios (parliament approves the deal; deal rejected, extension, elections called; deal supported but conditioned on a referendum; deal rejected, no-deal exit) and markets will move ahead of the special vote on Saturday and also after the weekend. High volatility is set to prevail”, wrote Yohay Elam, analyst at FXStreet
“Despite Prime Minister Johnson's deal being unlikely to pass Parliament on Saturday, we believe the tail risk of a no-deal Brexit even after a potential election has diminished further. This also partly explains the positive risk rally we have seen on the renewed Brexit optimism. While we previously feared a Johnson victory in a snap election would lead us to a no-deal Brexit, this is no longer the case. In our opinion, it is difficult to see a path to a no-deal Brexit now”, explained analysts at Danske Bank.
Despite GBP/USD moved off highs, it still holds in positive territory for the day and more than five hundred pips above the level it had a week ago, reflecting how expectations have changed, although the Brexit drama is not yet over.
Levels to watch
The bias continues to point to the upside but the bullish momentum eased over the last hours. The area around 1.2750 has become relevant in the short term and a firm break below would clear the way to a correction. The next support might be seen at 1.2660. On the upside, above 1.2890, the Pound could gain momentum, and attention would turn to the 1.3000 zone.
- Manufacturing sales in Canada rose more than expected in August.
- Industrial production in the United States (US) contracted in September.
- Crude oil lost momentum after the EIA data showed large increase in crude oil stocks.
After spending the majority of the day moving sideways near the 1.32 handle, the USD/CAD pair turned south during the American trading hours and fell to its lowest level since late July at 1.3131. As of writing, the pair was trading at 1.3135, losing 0.5% on a daily basis.
Earlier in the day, Statistics Canada reported that manufacturing sales in Canada rose 0.8% in August following July's contraction of 1.3% and surpassed the market expectation of 0.6%. On the other hand, the ADP's Employment Change came in at 28,200 in Canada to miss analysts' estimate of 56,500. However, ADP's August reading got revised up to 109,900 from 49,300 to help the Loonie preserve its strength.
In the meantime, the weekly report published by the Energy Information Administration (EIA) showed that crude oil stocks in the US increased by 9.3 million barrels and caused crude oil to start erasing a portion of daily gains to keep the pair's losses limited for the time being.
US Dollar Index pushes lower on dismal data
Meanwhile, the Federal Reserve's monthly publication revealed that industrial production and manufacturing production contracted by 0.4% and 0.5%, respectively, to remind investors of the manufacturing sector's weakness. The US Dollar Index extended its slide on the disappointing data and was last down 0.37% on the day at 97.65.
Commenting on the US data, "Looking ahead the outlook for manufacturing remains poor. Global economic weakness is hurting business sentiment and is resulting in weaker export growth," ING analysts said. "The strength of the dollar is compounding the problem and then when we add in the lingering negatives from the US-China trade war there is seemingly little to be optimistic about right now."
Technical levels to consider
- The DUP (Democratic Unionist Party) rejected the Brexit deal, alleviating, for now, the bullish pressure on the GBP.
- EUR/GBP is consolidating losses at multi-month lows, trading above the 0.8600 handle.
EUR/GBP daily chart
EUR/GBP four-hour chart
EUR/GBP 30-minute chart
Additional key levels
- Crude oil stocks rose more than expected in the United States (US).
- West Texas Intermediate (WTI) erased a portion of daily gains after the data.
The weekly report published by the US Energy Information Administration (EIA) revealed that commercial crude oil inventories in the US increased by 9.3 million barrels in the week ending October 11, compared to analysts estimate for a build of 2.9 million barrels.
With the initial market reaction, the barrel of WTI eased from session highs and was last seen trading at $53, still up 0.2% on a daily basis.
Key takeaways from the press release
"Refineries operated at 83.1% of their operable capacity last week."
"Gasoline production decreased last week, averaging 10 million barrels per day."
"Distillate fuel production increased last week, averaging 4.7 million barrels per day."
"Total products supplied over the last four-week period averaged 21.1 million barrels per day."
- Concerns over UK parliament rejecting Brexit deal weigh on market sentiment.
- US Dollar Index struggles to pull away from multi-week lows.
- Upbeat earnings figures allow Wall Street to push higher on Thursday.
The USD/JPY pair climbed higher toward the 109 handle during the European Trading hours as the announcement of the Brexit deal made allowed risk-on flows to dominate the markets. However, concerns over the deal failing to receive enough support from parliament after the Democratic Unionist Party formally said that they will be rejecting the proposed agreement caused the market sentiment to turn sour and weighed on the pair, which was last down 0.15% on the day at 108.58.
In addition to the changing risk-perception, the broad-based selling pressure surrounding the Greenback on Thursday forced the pair to extend its losses.
Dismal data hurt the USD on Thursday
The data published by the Federal Reserve revealed that industrial production and the manufacturing production contracted by 0.4% and 0.5%, respectively, in September. Additionally, the US Census Bureau announced that housing starts in September fell 9.4%. As of writing, the US Dollar Index is at its lowest level since late August at 97.60, losing 0.4% on a daily basis.
Meanwhile, upbeat third-quarter earnings figures helped Wall Street's main indexes start the day on a positive tone despite the souring market sentiment. Nevertheless, investors are likely to stay close to safe-havens while waiting for the UK parliament to vote on the proposed Brexit deal on Tuesday.
Technical levels to watch for
- EUR/USD is clinging to multi-week highs in the New York session.
- The level to beat for bulls is the 1.1140 resistance.
EUR/USD daily chart
EUR/USD four-hour chart
EUR/USD 30-minute chart
Additional key levels
- Netflix shares rise sharply on Thursday to lift the Communication Services index.
- All 11 major sectors of the S&P 500 are in the positive territory in the early trade.
Wall Street's main indexes started the day in the positive territory on Thursday as investors cheered the upbeat third-quarter earnings figures and the announcement of a Brexit deal, subject to the UK parliament's approval on Saturday.
As of writing, the Dow Jones Industrial Average was up 0.35% on the day while the S&P 500 and the Nasdaq Composite were adding 0.5%, and 0.78%, respectively.
Among the 11 major S&P 500 sectors, which are all in the positive territory following the opening bell, the Communication Services is up around 0.8% to lead the rally boosted by a more-than-8% upsurge witnessed in Netflix shares. The video streaming service provider announced that it added more subscribers than forecasted by analysts.
Additionally, Morgan Stanley shares are up nearly 4% on Thursday supported by better-than-expected third-quarter figures.
In view of analysts at Danske Bank, after the UK and EU27 reached a new Brexit deal today, the next uncertainty is whether Prime Minister Boris Johnson can get it over the finish line when the deal is put to a 'meaningful vote' on Saturday.
“The DUP has rejected supporting the deal, so it will be very very difficult for Johnson to get a majority in the House of Commons (which would have been difficult even assuming the DUP was on board). We still doubt the pro-Brexit Labour MPs will vote in favour of a deal, which is harder than that put forward by Theresa May. Some of the moderate Conservatives, who Boris Johnson expelled from the party last month, have also hinted they will reject the deal. Our base case remains another extension followed by a snap election.”
“In our view, it is natural to ask why Johnson has reached an agreement with the EU knowing it will be difficult to get it through Parliament. We believe there are two reasons. First, it some MPs may get cold feet when the actual voting takes place. One way of addressing this is asking EU leaders to state they will reject another extension, i.e. stating it is 'this deal or no deal'. Second, Prime Minister Johnson and his team probably think with his new Brexit deal he will stand stronger against Jeremy Corbyn in a potential election campaign , as the Brexit deal is cleaner than that of Theresa May. In the event he won the election, he could pass the Brexit deal without the need of the DUP.”
“Despite Prime Minister Johnson's deal being unlikely to pass Parliament on Saturday, we believe the tail risk of a no-deal Brexit even after a potential election has diminished further. This also partly explains the positive risk rally we have seen on the renewed Brexit optimism. While we previously feared a Johnson victory in a snap election would lead us to a no-deal Brexit, this is no longer the case. In our opinion, it is difficult to see a path to a no-deal Brexit now.”
Nathan Janzen, senior economist at the Royal Bank of Canada, notes that Canada’s headline manufacturing sales rose 0.8% in August while volume sales increased 0.6%.
“The bounce-back in August manufacturing sales (from a 1.3% drop the prior month) was largely as-expected. Transitory summer motor vehicle assembly shutdowns weighed on output in July and a resumption of activity contributed to an increase in August. Still, sales were also up 0.7% excluding the motor vehicle.”
“Controlling for price-effects, sale volumes were up 0.6% from July, and 1.1% ahead of year-ago levels. That is admittedly an uninspiring growth rate. But it still leaves the manufacturing sector looking relatively resilient given sharper deterioration in the industrial sectors of global peers – most significantly for Canada, in the United States – alongside escalating global trade tensions.”
- DXY remains unable to gather serious traction.
- Yields of the US 10-year note come down from 1.180%.
- Philly Fed manufacturing gauge disappointed expectations.
The US Dollar Index (DXY), which tracks the buck vs. a bundle of its main competitors, remains under pressure in the 97.70/75 band so far.
US Dollar Index focused on more US data
The index remains under heavy pressure and is navigating its third consecutive session with losses.
Despite the strong bearish bias, the Greenback has managed to rebound from earlier new 2-month lows in the 97.50 region recorded in the wake of the Brexit deal.
In fact, the rally in the Sterling in past days on the back of rising optimism on a final agreement has been sustaining the improved sentiment in the riskier assets in detriment of the demand for the buck.
So far in the US docket, the Philly Fed manufacturing index came in at 5.6for the current month, missing consensus and lower than September’s 12.0. Further data saw Initial Claims at 214K WoW, Housing Starts dropping to 1.256M units (vs. 1.320M forecasted) and Building Permits at 1.387M units (vs. 1.340M expected).
Also weighing on USD, Industrial Production contracted 0.4% MoM in September and Manufacturing Production dropped 0.5% inter-month. In the same line, Capacity Utilization ticked lower to 77.5%.
What to look for around USD
DXY remains entrenched in the lower bound of the range in the mid-97.00s amidst rising scepticism on the US-China trade front and increased optimism in the riskier assets. In the meantime, investors’ attention has now shifted to the increasing likeliness of another insurance cut by the Fed at the October meeting amidst some loss of momentum in the US economy, particularly after recent figures from the manufacturing sector, mixed inflation results and some slowdown in consumer spending. On the broader view, the constructive outlook in DXY looks a bit damaged but it still is in play amidst a divided FOMC vs. a broad-based dovish stance from the rest of the G-10 central banks. In addition, the positive view on USD remains well sustained by its safe haven appeal and the status of ‘global reserve currency’.
US Dollar Index relevant levels
At the moment, the pair is losing 0.28% at 97.70 and faces the next support at 97.50 (monthly low Oct.17) seconded by 97.36 (200-day SMA) and then 97.17 (low Aug.23). On the upside, a breakout of 98.35 (55-day SMA) would open the door to 98.72 (21-day SMA) and finally 99.25 (high Oct.9).
According to the monthly Industrial Production and Capacity Utilization report published by the Federal Reserve, industrial production in the United States contracted by 0.4% on a monthly basis in September following August's expansion of 0.8% and came in worse than the market expectation of -0.1%.
"For the third quarter, industrial production rose at an annual rate of 1.2% following declines of about 2% in both the first and the second quarters," the Fed noted in its publication. "Manufacturing production decreased 0.5% in September, with output reduced by a strike at a major manufacturer of motor vehicles."
Finally, the capacity utilization edged lower to 77.5% in the same period from 77.9% in August.
The Greenback continues to have a tough time recovering its daily losses against its major rivals after this data. As of writing, the US Dollar Index was down 0.32% on the day at 97.70.
In an interview with CNBC on Thursday, White House economic adviser Larry Kudlow said that he sees "lots of momentum" to complete the United States (US)-China trade agreement.
"Phase-one of the US-China trade includes lowering of nontariff barriers on agriculture, not just purchases," Kudlow added and said the phase-one deal with China is "for real."
The 10-year US Treasury bond yield was up 1.1% on a daily basis at 1.760% following these comments and the S&P 500 Futures was up 0.32% to suggest Wall Street's main indexes will open the day in the positive territory.
- EUR/USD clinched monthly tops near 1.1140, receded afterwards.
- The recent Brexit deal sustained the up move to 2-month highs.
- US Philly Fed index dropped to 5.6 in October.
In spite of the correction lower from recent 2-moth highs, EUR/USD keeps the bid stance unchanged above the recently surpassed 1.11 handle.
EUR/USD boosted by Brexit deal, USD weakness
The rally in the pair remains well and sound for yet another session, this time it managed to advanced to fresh multi-week highs near 1.1140, where sits the 100-day SMA and some resistance emerged.
The continuation of the selling bias in the Greenback stands as the almost exclusive reason behind the sharp nearly-3-cent rebound in spot from 2019 lows in the 1.0880 region recorded on October 1st.
In addition, spot gathered extra pace after the EU and the UK reached a Brexit deal earlier today, all amidst an improved mood in the risk-complex.
In the docket, the always-relevant Philly Fed index came in below estimates at 5.6 for the current month, while Building Permits surprised to the upside and Housing Starts disappointed expectations in September.
What to look for around EUR
The upside momentum in the pair has extended further north of the critical 1.1100 handle today against the backdrop of a weaker buck and optimism from the recently clinched Brexit deal. Despite the positive 3-week streak in spot has been sponsored by the persistent offered bias in the Dollar, the outlook in Euroland continues to deteriorate and does nothing but justify the ‘looser for longer’ monetary stance by the ECB and the bearish view on the single currency in the longer run. In addition, the possibility that the German economy could slip into recession in Q3 remains a palpable risk for the outlook and is expected to weigh further on EUR.
EUR/USD levels to watch
At the moment, the pair is gaining 0.46% at 1.1122 and faces the next barrier at 1.1139 (monthly high Oct.17) seconded by 1.1163 (high Aug.26) and finally 1.1186 (61.8% Fibo of the 2017-2018 rally). On the flip side, a break below 1.1049 (21-day SMA) would target 1.0988 (21-day SMA) en route to 1.0879 (2019 low Oct.1).
According to Mark McCormick, global head of FX strategy at TD Securities, Brexit news has dominated headlines, as the UK/EU have reached a deal.
“Sentiment has trumped fundamentals, reflecting the fact that GBP now sits 2.5-sigmas from HFFV. Still, we note that there's a major rub to this deal, as it needs to pass the UK parliament Saturday. That's unlikely and the result of a failed agreement brings us back to the prospects of a general election later this year.”
“Still, one of the major developments has been the reduction of no-deal tail risk. That's part of the reason GBP has decoupled from short-term drivers. Our suite of LFFV models implies an 11% discount in GBP, highlighting a Brexit premium that is likely to get priced out if we start to get closure on the three-year saga.”
“For the rest of the G10, the market prefers to run with the weak USD theme. As we noted yesterday, we see some nice discounts on offer in the antipodes and the scandis. This group looks attractive against CAD ahead of next week's election. USDJPY rallies look capped ahead of the 200dma while the UK Parliament vote to decide the fate of the EUR over the coming days.”
In a press conference on Thursday, British Prime Minister Boris Johnson said that lawmakers need to deliver Brexit without any more delay and added that the future partnership can be incredibly positive for the United Kingdom and the European Union.
The GBP/USD pair didn't pay any mind to Johnson's remarks and was last seen trading near the 1.28 handle, losing 0.28% on the day. Below are some additional takeaways, per Reuters.
"I do think this deal represents a good deal. It's a reasonable fair outcome."
"Now is the moment for us to get Brexit done. We are a quintessential European country."
Jane Foley, senior FX strategist at Rabobank, suggests that since the start of this month EUR/USD has crept higher by over 2% with a significant surge following this morning’s news that the UK and the EU had agreed a Brexit deal.
“Brexit is clearly a factor in the move with optimism with respect to Brexit buoying the pound and rubbing off on the EUR. That said, USD weakness also appears to be contributing to the move in EUR/USD. This raises the question of whether the greenback is being subjected to profit-taking or if we are seeing the start of a more prolonged period of weakness in the USD.”
“This morning’s news that the UK and the EU have agreed on a Brexit deal has injected a fresh shot of enthusiasm into GBP. Over the past week the EUR has been clinging to GBP’s coat-tails as optimism regarding the prospects of a deal grew. The fact that no side was walking away from the negotiating table, combined with the fact that the Benn Act should in theory rule out the prospect of a hard Brexit on October 31 resulted in a significant degree of short-covering in GBP since the start of this month.”
“Looking forward we continue to expect upside potential for the single currency will be limited by the weak German economic backdrop and by speculation that the ECB could ease policy further in the months ahead. Clearly the outlook for EUR/USD also depends on the broad performance of the greenback.”
“We have been USD bulls since March 2018 and the DXY dollar index has been trending higher throughout the ensuing period. Supported by the Brexit-effect it is likely that this month’s pop higher in EUR/USD is related to profit-taking. That said, it is useful to re-evaluate the factors that have been driving USD strength in this period in order to assess whether its resolve is being to wane.”
“Given the risks to global growth, we expect USD demand to remain well underpinned in the coming months. That said we do expect some broad-based slippage in the USD next year based on our assumption of an aggressive step up in the pace of Fed rate cuts. Our 3 month forecast for EUR/USD is 1.07 and our 12 month forecast is 1.12.”
- The cable is down nearly 200 pips from daily highs as the DUP (Democratic Unionist Party) rejects the Brexit deal.
- GBP/USD is now battling with the 1.2800 handle.
GBP/USD daily chart
GBP/USD four-hour chart
GBP/USD 30-minute chart
Additional key levels
- USD/TRY moves higher after two daily pullbacks.
- Turkey rejected Trump’s letter. US sanctions loom.
- Operation ‘Peace Spring’ remains well in place.
The Turkish Lira has resumed the downside on Thursday and is now lifting USD/TRY to the vicinity of the 5.90 level, where some decent resistance appears to have emerged.
USD/TRY focused on Syria… and Trump
The offered bias seems to have returned to the Turkish currency in the second half of the week and is now prompting the pair to reverse two daily pullbacks and refocus on the upside.
TRY trades on a soft fashion today as the likeliness of US sanctions against the country has picked up traction after President R.T.Erdogan ‘dismissed’ a letter from President Trump earlier in the morning. In the meantime, the US Congress has intensified its pressure on Trump’s recent decision to pull back army troops from Syria.
In the Turkish calendar, in the meantime, Industrial Production contracted 3.6% on a year to August, intensifying the contraction recorded in the previous month. Additional data saw Retail Sales expanding at a monthly 0.3% and the Budget deficit came in at TRY 17.71 billion in September.
What to look for around TRY
The outlook on the Turkish Lira has deteriorated further following the start of the military operation in Syria and the subsequent threats of US sanctions. That said, TRY is expected to remain well under heavy pressure both on the geopolitical and domestic economic front, while the psychological 6.00 mark is back on the radar. On the latter, scepticism among investors regarding the ability of the country to finally embark on a more sustainable growth path (Erdogan set a target of 5% GDP growth in 2020) and to implement the much needed structural reforms - crucial to bring in more stability to the currency and sustainability to domestic fundamentals – remains on the rise and cast dark clouds over occasional bouts of strength in the currency.
USD/TRY key levels
At the moment the pair is gaining 0.12% at 5.8910 and a surpass of 5.9416 (61.8% Fibo of the May-August drop) would open the door to 6.0027 (monthly high Aug.26) and then 6.0753 (78.6% Fibo of the May-August drop). On the other hand, the next support emerges at 5.7689 (21-day SMA) followed by 5.6553 (200-day SMA) and finally 5.6367 (monthly low Sep.30).