US Dollar Vulnerable On FOMC Disappointment

Monday rolled in with a disappointing data report from China (Industrial Production Actual 6.9% vs. forecast of 8.8%), which suggests that the risks to Q3 growth are on the downside. AUDUSD dropped on the news but quickly recovered in part due to "short squeeze" as AUDUSD support in the 0.8990 area held.
A flurry of flip-flopping Scottish independence referendum polls released over the weekend ensured that short-term GBPUSD trading profits are only rented if traders don't remain nimble. This morning's small drop in US Capacity Utilisation ( Actual 78.8% vs. forecast 79.3%) led to a slightly softer US dollar. The dip may indicate that perhaps the US dollar rally, in anticipation of the Federal Open Market Committee (FOMC) meeting, may be a tad overdone.
Staring down the barrel of FOMC risk

Wednesday's FOMC meeting, statement and press conference is highly anticipated because market pundits have convinced themselves that the US Federal Reserve chairman Janet Yellen and company will shift to a hawkish bias. A San Francisco Federal Reserve report last week that suggested that market participants were too doveish in their Fed interest rate views supports the hawkish camp. At the same time, the far weaker-than-expected US nonfarm payrolls report was dismissed even though Yellen has stated, repeatedly, that labour market slack is a major concern to the Fed. We will have our answer on Wednesday but the risk is that the market will be disappointed, which would jeopardise recent US dollar gains.

Lots of fire for a ceasefire

The Washington Post is reporting heavy fighting in Ukraine between pro-Russian separatists and government troops, with both sides blaming each other for shooting first. EurActiv.com reports that Russia is blaming the United States and some EU nations for driving a wedge between Russia and Europe. The US and its allies remain upset over what they view as Russia's incursion into a sovereign nation. The US and their allies don't view their threat to bomb ISIS strongholds in Syria as a violation of Syria's sovereignty, which has to be confusing for Moscow. For now, these ongoing geopolitical tensions are just a distraction to FX markets, which view them as isolated and regional issues.

Will Poloz pluck Loonie's feathers?

The governor of the Bank of Canada, Stephen Poloz, is viewed by many as a supporter of a weaker Canadian dollar. His repeated warnings that low and falling inflation could result in policy action has undermined the Canadian dollar for the past year. He dismissed the recent increases in inflation as "temporary" and is in danger of being proven right on Friday if the Canadian CPI dips.

The topic of Tuesday's speech by Poloz (the role of a floating exchange rate in the Canadian economy and in the Bank's policy framework) may be setting the stage for another verbal shot at the value of the Loonie. It is probably fairly safe to assume that he won't be discussing the merits of Canadian dollar strength in the current economy, leaving the currency very vulnerable to the perception of further negative bias.
Key US data releases

Tuesday: August Producer Price Index (1.8% year-over-year).

Wednesday: August CPI (Forecast 1.9% year over year, Core 1.9% year-over-year). Essentially, no change in the data, which should mean no reaction to the data, especially ahead of the FOMC statement.

Wednesday: FOMC interest rate decision, statement and press conference.

Thursday: August Housing Starts (Forecast 1.035 million). Modest pullback expected from last month's figures. However, the upward trend is US dollar supportive.

Key Canadian data releases

Tuesday: Manufacturing Shipments (Forecast 1.0%). Improving manufacturing shipments suggest overall improvement in the domestic economy, which should provide support to the Loonie.

Tuesday: 17:45 GMT: Bank of Canada governor Stephen Poloz's speech.

Friday: August CPI (Forecast 2.1% year over year, Core 1.8%, year-over-year). A downward tick in CPI would support the BoC's view that recent increases were temporary. If so, it is a Canadian dollar negative.

Chart: Change in Canadian CPI