Global markets were unsettled throughout October, as traders dealt with escalating tensions between the West and Russia, UK political and budget turmoil, Bank of Japan intervention, and concerns about China following Xi Jinping extending his term for five years.
The fall-out from the UK mini-budget of September 23, rippled through global FX in October culminating with Chancellor of the Exchequer Kwasi Kwarteng getting sacked October 14, just forty-four days on the job. Prime Minister Liz Truss followed him out the door six days later.
That allowed GBPUSD to rally from 1.10540 to 1.1645 before sliding into month end.
The Bank of Japan intervened aggressively, buying Japanese yen, and selling US dollars. The Ministry of Finance confirmed they spent 6.35 trillion yen, or about US $44 billion. The activity has served to limit gains above 150.00 but has not changed the outlook that as US rates rise and Japan rates remain unchanged, USDJPY will trade higher.
The previously announced Opec production cuts started November 1 and combined with reports that China is easing covid restrictions, has underpinned WTI oil prices.
Economic data releases take center stage in November, especially after the Fed and Bank of Canada said future rate moves are dependent upon how the data is effecting economic growth.
The USD and Federal Reserve
The US dollar closed out October on a mixed note. The New Zealand dollar was the best performing major G-10 currency, gaining 3.4% while the Japanese yen wore the crown of as the worst performer, losing 2.14%.
The US Fed hiked rates 75 bps as expected but were surprised by Chair Powell’s hawkish tone in the press conference. Mr Powell threw a wet blanket on rate hike pivot speculation saying “it is very premature to be thinking about or talking about pausing our rate hikes. We have a ways to go. We need ongoing rate hikes to get to that level of sufficiently restrictive.”
The FOMC will continue to base decisions meeting by, and those decisions will be based “on the totality of incoming data and their implications for the outlook for economic activity and inflation. The next FOMC meeting is December 14 leaving plenty of time for data deviations to continue to shape the size and scope of future rate hikes.
The outlook for the greenback in November is positive due to upgraded US rate hike expectations. US 10-year Treasury spreads are widening in favour of the US against similar bonds in the UK, European Union, and Canada.
The Canadian Dollar and Bank of Canada
The Canadian dollar traded erratically in October but managed to finish the month with a 1.03% gain against the US dollar.
The Bank of Canada hiked rates 50 bps October 26 catching many market participants off-guard. Hotter than expected inflation, inflation concerns outlined in the Business Outlook survey, and earlier comments by Governor Tiff Macklem set the stage for a 75 bp bump.
The BoC opted for the smaller increase due to expectations for sharply lower global and domestic growth. However, The BoC said “The Governing Council expects that the policy interest rate will need to rise further,” depending on their assessment of how the cumulative tightening in 2022 is impacting the economy.
The spread between CAD/US government bonds widened in favour of the US which undermines the Canadian dollar. The Canadian dollar will rally if the spread narrows and WTI oil prices rise.
Oil Price
Opec ‘s 2.0 million barrel/day production cuts took effect November 1, but since Opec has be unable to achieve its previous quotas, the cut is actually 1.2 m/b. Ongoing discussions about imposing a price cap on Russian oil combined with hopes China oil demand rebounds from Covid restrictions, will underpin prices this month.
Forecast Table
Bank 2022-USD/CAD Q3 2022-USD/CAD Q4
Scotiabank* 1.38 1.35
CIBC 1.37 1.38
TD Bank* 1.38 1.38
National Bank 1.37 1.39
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.