The Morning Update

The USD slips, oil prices firm, equity markets are up, and US yields slip amid cautious month-end trading. Equity markets firm on the last trading day of October, but are set for their worst month since September 2022. BP Plc missed earnings estimates and suffered its worst day in six months. The Japanese Yen fell the most in two months after the Bank of Japan made only minor changes to its policy, disappointing investors. China's Manufacturing PMI unexpectedly contracted in October, reflecting the weakness in demand related to the housing slump and a slowdown in infrastructure spending. Markets remain cautious, continuing to monitor the Israel-Hamas conflict, as they await the FOMC interest rate decision on Wednesday. In focus today, the CAD GDP, US Employment Cost Index, US Housing Price Index, Chicago Purchasing Manager's Index, and Consumer Confidence which will help provide some intraday direction to currency markets.

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In other news. Russia tightens capital controls on Western companies. Israel says its troops are spreading through northern Gaza. Venezuela court suspends results of opposition's primary election. China leads record central bank gold buying in the first nine months of 2023. The UK shop price inflation fell to its lowest level in over a year. US car workers suspend strike after reaching tentative deal with GM. Mortgage payment shocks pose risks to Canadian banks - RBC. Young Canadians more anxious about debt, more likely to miss a bill payment - Equifax.

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In currency news. Yen weakens beyond 150 after BoJ's piecemeal policy tweak disappoints markets. Chinese yuan eases after domestic factory activity unexpectedly contracts. GBP pauses as weak UK economy data sets the stage for the BoE rate decision on Thursday, and the USD steadies as safe-haven buying pauses ahead of the FOMC on Wednesday. CNY slipped 0.1%, while Asian currencies fell 0.15% on average vs USD. Trading currencies are mixed with JPY tumbling 0.9%, NOK weakening 0.3%, AUD & CHF down 0.1%, while NZD firms 0.1%, SEK & MXN gains 0.2% and NOK strengthening 0.4% vs USD.

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In commodity markets. Oil prices strengthened by 0.8%, Natural Gas prices rallied by 1.2%, Gold and copper prices inched higher by 0.1%, Silver prices slipped by 0.15%, Wheat prices tumbled by 1.2% and Soybean prices eased by 0.2%.

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CAD strengthens from October lows on a combination of month-end demand and easing of USD long positions heading into Wednesday's Federal Reserve interest rate decision. On Monday, BoC Governor Macklem said fiscal and monetary policy are rowing in opposite directions, making it harder to bring inflation down. The Governor went on to say, that as the economy bends under the weight of higher borrowing costs, the BoC opted to maintain its key interest rate at 5%, but left the door open to more rate hikes if inflation remains high. Speculators have increased their bearish bets on the CAD, data from the US CFTC showed that net short CAD positions increased week over week. Today the CAD GDP is expected to improve m/m to +0.1% vs 0% in August, a print outside of the expected range will impact CAD volatility.

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EURCAD extends gains, rallying 2.5% in October, and looks set to close at its highest levels in six weeks vs the loonie.

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EUR extends its month-end rally on positive inflation data. Eurozone inflation levels y/y beat expectations by falling to 2.9% vs expectations of 3.1% and following the previous month's 4.3%. Eurozone GDP missed expectations of 0.2% and printed at 0.1% y/y Q3, while Quarter vs Quarter Q3 slipped into recession territory printing at -0.1%. The data supports the expectations the ECB will maintain its stance on keeping interest rates static for the rest of 2023. We expect the Euro to be capped on any rallies ahead of the Fed Rate decision tomorrow and the ongoing geopolitical concerns. Intraday US data will help provide intraday direction to currency markets.

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GBPEUR continues under pressure, looking to close October down near 1%, and is retesting lows not seen since May 2023 as markets anticipate the BoE will keep interest rates on hold at its meeting on Thursday.

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GBP gets a reprieve vs USD but remains under pressure vs its peers as markets await the BoE on Thursday. The pound is testing 1.2200 on a weaker USD vs underlying support for the pound. The ongoing Hamas-Israel conflict, China growth concerns, and a still robust US economy are expected to continue to support a strong USD over the GBP into the later part of Q4/23. The BoE over the last 18 months in one of the most aggressive rate hiking cycles in its history hiked interest rates from 0.1% to 5.25% and then hit the pause button in September. Inflation levels have fallen from the peak of 10.7% in Q4/22 to 6.7% in September, but the process has set the UK on track to enter a recession into 2024. We expect the BoE, conscious of the impact of its aggressive interest rate policies will continue to pause interest rates in November and likely through Q1/24. Intraday US data will drive intraday direction with investors preferring to be sidelined ahead of the FOMC rate decision tomorrow.