Image via Bank of Canada
Portugal Retains Investment Grade Rating
Over the weekend, ratings agency DBRS chose to let Portugal retain its investment grade rating with the outlooks also unchanged at stable. Consequently, Portuguese Government Bonds and Government-guaranteed bonds retain their eligibility for the ECB’s new QE program and can be used as collateral in the ECBs refinancing operations. The DBRS noted that they had considered Portugal’s Eurozone membership and its adherence to the EU’s economic governance framework which facilitates faster credible macroeconomic policies.
Attention now turns to Italy. Recent polling for the December 4th Constitutional Reform Referendum gives a small majority to the “no” camp. PM Renzi had initially attached his own political future to the referendum declaring his intention to resign in the event of a no vote, triggering early elections. However, Renzi has since distanced himself from these comments creating uncertainty about his intentions and the future of the Italian government.
EuroZone PMIs Print Positively
The October EuroZone composite PMI was stronger than expected yesterday rising to 53.7 from 52.6 in September. The Manufacturing PMI also increased to 53.3 from 52.6 whilst the Services sector PMI rose to 53.5 from 52.2 in September. Importantly, the more forward-looking components of the Services PMI indicator, such as the business expectations and the new orders, improved significantly. However, the more forward-looking components of the Manufacturing PMI weren’t as positive with the new orders component rising only slightly and new orders declining.
The employment component of the Composite PMI indicator increased to 52.5 from 52 reflecting an ongoing moderate recovery in the labour market. In total, the PMI readings indicated a modest pickup in GDP growth for the final quarter of the year.
Bullard Looks For One Rate Rise This Year
Yesterday James Bullard, Arkansas Fed President, spoke about the US economy and monetary policy. Bullard noted that he sees one rate hike as all that is necessary for now and that low-interest rates are likely to continue over the next two to three years. Bullard’s comments come shortly after Fed’s Williams who noted last week that “this year would be good” for a rate hike and that his preference was “sooner rather than later.”
He also commented that the divisions in the FOMC are not as deep as they appear and there should be no issue with the FOMC reaching consensus. These comments fall in line with the latest FOMC minutes which revealed that many members felt it was a “close call” to remain on hold at the meeting, suggesting the Fed is moving closer to a consensus.
The US Dollar Index is currently challenging the February high at 98.60 having now firmly broken out above the bearish trend line from last year’s highs. If price can sustain a break above the 98.60 high, the next key resistance will be a test of the bullish channel resistance trend line.
Poloz Fuels CAD Volatility
The Canadian Dollar surged overnight on comments from BOC Governor Poloz. Poloz said that the bank’s best plan right now was to “wait for the next 18 months or so”. However, CAD reversed gains as Poloz noted that he wasn’t referring to monetary policy but instead was referring to the timeframe over which the output gap is forecast to close.
Markets have become increasingly focused on the prospect of easing by central banks in the commodity bloc. However, the implied probability of a BOC rate hike over the next 12 months remains quite low at 33%. CAD is likely to remain sensitive to data as the BOC continue to demonstrate an easing bias and a data dependent stance.
For now, USDCAD remains in the very upper end of the recent range having broken above the 1.33 March high. Price has stalled at a test of the bullish channel resistance trend line which looks to be forming a rising wedge pattern.