U.S. Growth To Boost Dollar

December interest rate hike optimism has lifted the USD to 8 month highs

Fed member comments and economic indicators showing sustained growth have convinced investors that the U.S. Federal Reserve will raise the Fed funds rate when its meets at the end of the year. The CME FedWatch tool is now at a 70 percent probability of a rate hike during the last FOMC of 2016.

The USD is mixed against majors with the biggest wins coming versus the CAD, EUR and CHF. The European Central Bank (ECB) held rates and its quantitative easing program unchanged dropping hints of a December update. The monetary policy pergence that is anticipated in December has boosted the USD versus the single currency.

Oil prices had an eventful week, as a surprise major drawdown in U.S. oil inventories appreciated the price per barrel, but over-supply fears after comments from the Russian Energy Minister suggested the oil producing giant is content with only freezing prices not cutting them.

The U.S. preliminary gross domestic product (GDP) for the third quarter of 2016 will be the highlight of the week’s economic releases. The U.S. Bureau of Economic Analysis will publish the Q3 advanced GDP on Friday, October 28 at 8:30 am EDT. The value of U.S. produced goods is expected to gain on the disappointing Q2 and given the momentum of the December rate hike a solid number near the forecasted 2.5 percent could further keep the USD rally going.

EUR/USD Oct 17 – 21 Chart

The EUR/USD lost 1.185 percent in the last week. The single currency is trading at 1.0865, an 8 month high for the USD as the EUR is scrambling after the European Central Bank (ECB) kept rates and its quantitative easing program unchanged. Comments from ECB president on Friday put further downward pressure on the EUR, which remains the new the low of the week (1.0859).

Fed speakers have reassured the market that the December Federal Open Market Committee (FOMC) will feature the much-awaited interest rate hike. The USD has been gaining on interest rate differential expectations, but so far the American central bank has not delivered citing macro economic headwinds.

West Texas Oil Oct 17 – 21 Chart

The price of oil gained 0.847 percent in the last 5 days. West Texas is trading at $50.37. Crude posted a fifth weekly gain, but this time the advance in energy prices was not so once sided. The biggest positive factor for oil prices this week was the surprise drawdown of U.S. oil inventories. Forecasted at a supply gain of 2.2 million barrels the stock data shocked with a drawdown of 5.2 million barrels.

The unexpected news drove the price to a weekly high of $51.73. It was all downhill for crude after that. The USD gained as it was clear the ECB was not going to make a big announcement preferring to push any major intervention towards the end of the year.

The Organization of the Petroleum Exporting Countries (OPEC) appeared to single handedly save producers after a second attempt to reach an agreement on freezing oil production turned into a surprise production cut. Cracks are starting to appear as there has been conflicting comments out of Russia, and this week Russian Energy Minister will meet with his Saudi counterpart to discuss a freeze. High levels of production and lack of commitments to cut have keep the price of crude from gaining further but are still gaining ground despite a strong dollar.

USD/CAD Oct 17 – 21 Chart

The USD/CAD gained 1.617 percent in the last week. The pair is trading at 1.3344 after the Bank of Canada (BoC) decided to leave rates unchanged at 0.50 percent and the December rate hike by the U.S. Federal Reserve keeps gaining momentum. The loonie had a tough week versus the greenback, as gains in oil prices at the beginning of the week started to erode as the week entered its final two days. The USD surged as Fed member comments and the lack of details by the ECB after keeping its benchmark rate and QE program unchanged.

Canadian economic indicators finished the week on a negative note, as inflation and retail sales both came in under expectations. The core readings (excluding volatile items) were nevertheless underwhelming with core CPI at 0.2% and core retail sales at 0.0 percent. BoC governor Stephen Poloz was dovish on Wednesday and said that the central bank was close to cutting rates for the first time this year.

The central bank will await the announced economic update by the federal government due November 1 before deciding the next course of action. Canadian negotiators abandoned the Canada-Europe Trade Agreement (CETA) talks after failing to convince the Belgian region of Wallonia of the benefits of the deal.

Market events to watch this week:

Tuesday, October 25 4:00 am EUR German Ifo Business Climate 10:00 am USD CB Consumer Confidence 10:35 am GBP BOE Gov Carney Speaks 11:30 am EUR ECB President Draghi Speaks 8:30 pm AUD CPI q/q

Wednesday, October 26 10:30 am USD Crude Oil Inventories

Thursday, October 27 4:30 am GBP Prelim GDP q/q 8:30 am USD Core Durable Goods Orders m/m 8:30 am USD Unemployment Claims

Friday, October 28 8:30 am USD Advance GDP q/q

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