Will BoC Dismiss Softness In Inflation?

• Today, the main event will be the BoC rate decision. The forecast is for the Bank to remain on hold, having hiked rates at both of its latest meetings. Market participants seem to be in agreement, with the implied probability for a hike being less than 20%. Economic developments in Canada have been mixed since the Bank last met. On the bright side, the labor market tightened further in September, while the economy’s output gap continued to close in Q2. However, retail sales for August unexpectedly dropped, and perhaps most importantly, the core CPI rate for September declined. Bearing these in mind, we believe that market focus today will be on what signals the Bank sends regarding the likelihood of another hike by year-end. At the time of writing, that probability rests at 54%.
• Therefore, if the Bank dismisses this soft patch in inflation as being transitory and keeps the prospect of another rate hike in December on the table, CAD could recover some of its recent losses. On the other hand, should policymakers appear more cautious, indicating that continued softness in inflation could lead them to pause their normalization cycle, the currency could continue correcting lower.
• USD/CAD traded somewhat higher yesterday, breaking above the resistance (now turned into support) of 1.2660 (S1). Following the break above the 1.2600 (S2) key hurdle on the 20th of October, the short-term picture has turned positive in our view. Nevertheless, a lot of the pair’s forthcoming direction will depend on the outcome of today’s BoC policy gathering. If policymakers appear more concerned than previously with regards to inflation, then the bulls could take charge again and perhaps aim for our next resistance of 1.2770 (R1). On the other hand, if the Bank dismisses the latest softness in prices, USD/CAD could fall back below 1.2660 (S1), and even back below the 1.2600 (S2) zone. Having said that, as long as any possible slide remains limited above the short-term uptrend line drawn from the low of the 12th of September, we would treat it as a corrective move.

AUD tumbles on disappointing CPI prints

• The Aussie came under renewed selling interest overnight, following the release of Australia’s CPI data for Q3. The headline CPI rate ticked down while the trimmed mean one remained unchanged, both missing their forecasts for ticking up. These softer-than-expected prints likely scaled back market expectations for a more hawkish tone by the RBA in the foreseeable future. Given the lack of major events on the Australian economic calendar over the next days, we think that AUD may remain on the back foot for a while, perhaps until the early-November RBA gathering.
• AUD/USD fell sharply during the Asian morning Wednesday following Australia’s disappointing CPI prints. The rate broke two support (now turned into resistance) barriers in a row to stop fractionally above the 0.7710 (S1) support line. Bearing in mind that the rate is now trading back below 0.7800 (R3), we switch our stance to cautiously negative. A clear dip below 0.7710 (S1) could confirm that and perhaps pave the way for our next support of 0.7685 (S2). Nevertheless, given that the overnight tumble appears overextended, we would stay careful of a possible corrective rebound before the bears decide to take the reins again.

As for today’s economic data:

• In the UK, the 1st estimate of GDP for Q3 may attract extra attention given our proximity to the November BoE meeting. The forecast is for the economy to have grown at the same pace as in Q2. We view the risks surrounding that forecast as skewed to the upside, considering that the NIESR estimate of GDP showed growth accelerating slightly in Q3. An upside surprise could heighten speculation for a BoE hike next week and thereby, support GBP.
• From Germany, we get the Ifo survey for October and the forecast is for both the current conditions and the expectations indices to have ticked down.
• In the US, durable goods orders for September are due out. Expectations are for the headline rate to have declined but to still remain in positive territory, while the core rate is expected to have held steady. We view the risks surrounding both of these forecasts as tilted to the upside as well, considering that the New Orders sub-index of the ISM manufacturing PMI for the month rose, which suggests accelerating growth in new orders.

USD/CAD

Support: 1.2660 (S1), 1.2600 (S2), 1.2530 (S3)
Resistance: 1.2770 (R1), 1.2850 (R2), 1.2940 (R3)

AUD/USD

Support: 0.7710 (S1), 0.7685 (S2), 0.7655 (S3)
Resistance: 0.7740 (R1), 0.7770 (R2), 0.7800 (R3)