UK To Get New PM, USD/CAD Bottoms

The next 2 weeks will be a busy one for the forex market but the lack of economic data on Monday has led to relatively quiet trade. The greenback moved higher against most of the major currencies after Fed President Rosengren suggested that he doesn’t support a rate cut. In an interview with CNBC on Friday, he described the economy as strong and said he doesn’t want to ease if the economy is doing perfectly well. As a voting member of the FOMC, his words carry heavy weight on the market. Yet even if he votes against a rate cut next week, there’s still enough support within the central bank for accommodation but his voice adds to the chorus of central bankers who are likely to opt 25bp over 50bp of easing this year. Bond traders were unfazed by his comments as they took Treasury yields lower but the Dow edged slightly higher. USD/JPY is trading below 108 and the rally should be limited to 108.75.

On Friday we talked about the possibility of a bottom in USD/CAD and we are seeing very strong evidence of the trend shifting after today’s move. USD/CAD closed above 1.31 for the first time in more than a week and this move opens the door for a stronger rally towards 1.34. Even though oil prices increased today, the overall trend of crude and the US-Canadian yield spread has favored a recovery and bottom in USD/CAD for some time. As minor as it may be, the surprisingly large drop in wholesale sales which fell -1.8%, the biggest decline since January 2015 could have been the straw that broke that camel’s back.

Tomorrow Britain will get a new Prime Minister. After weeks of voting, they’ve narrowed it down to two candidates – Boris Johnson and Jeremy Hunt. Johnson holds a strong lead over Hunt so baring an unexpected upset the former Mayor of London will become the country’s new leader. He’s been a key voice in the Leave campaign during the 2016 referendum and continues to push for a hardline strategy. So while his victory is widely anticipated his official nomination could still drive sterling lower as it would raise the odds of a no deal Brexit. The most urgent and important job for the new Prime Minister will be to strike an agreement with the EU that is acceptable by the government. The deadline for a deal is October 31st but there are reports that Brussels will offer an extension. Despite all the angst, the market is betting that a behind the scenes deal will help avoid a no deal Brexit. This past week the House of Commons passed a measure that would prevent the Prime Minister from proroguing (suspending) Parliament and forcing through a no deal. All the while UK data continues to surprise to the upside with wage growth running at the best rate in G-7. Employment is steady as well and retail sales shows that the UK consumer is willing to spend, political turmoil be damned. All of this sets us up for very strong pop higher if UK and EU work out some sort of compromise. At this point the opposition to a hard Brexit look unshakeable and regardless of the hard line rhetoric coming from Tories investors are optimistic that the next step will be Brexit delay not a no-deal exit.

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