USD/CAD came under pressure yesterday after dire GDP figures

Market Movers

• The flash estimate for euro-area HICP inflation in November is due for release and we expect headline inflation to increase to 0.2% y/y. The increase should be driven by the volatile food and energy price inflation, whereas we estimate that core inflation will fall slightly to 1.0% after jumping to 1.1% in October, which was the highest in more than two years. The higher core inflation has mainly been driven by higher goods-price inflation but the euro appreciation during mid-2015 suggests the trend will reverse next year.

• In the US the ADP job report will be out ahead of Friday’s non-farm payrolls. Also, the Fed releases its Beige Book. A range of Fed speakers including Yellen who will likely reiterate the recent message that the US economy is ready for the first rate hike.

• Bank of Canada (BoC) is set to keep rates unchanged at today’s meeting. Canada is struggling at these levels for oil but BoC is set to get some help in adjusting to the new lower-oil-price environment from Fed hikes set to lift USD/CAD near term.

• We expect the National Bank of Poland to maintain the policy rate at 1.5%.

• Danish currency reserve figures due for release, see Scandi Markets.

Selected Market News

In the run-up to the December meeting the Fed is facing an aggravated dilemma: against expectations the US ISM manufacturing declined to 48.6 in November from 50.1 last month. This is the lowest level since June 2009 and the first time since 2012 the index fell below 50. Moreover, subcomponents were also weak overall. The weak ISM manufacturing report clearly puts the Fed in a difficult position. On the one hand, it has never increased rates when ISM manufacturing has been this low, on the other, the domestic part of the economy is clearly generating jobs. The focus in the US is now on Thursday's ISM non-manufacturing report and Friday's jobs report: we still expect both to come out at levels that would allow the Fed to hike in December, see Weak ISMmanufacturing in November puts Fed in difficult position, 1 December. Last night, Fed’s Evans stroke a dovish tone albeit it still seems he can accept a hike in December as long as the rate path is gradual. Indeed, the rate path seems the most important 'battleground' for the FOMC at the moment as the Fed needs to convince the market that the hiking cycle this time round will be exceptionally shallow in a historical comparison in order to not slay any signs of inflation returning.

Sentiment is mixed this morning with little overall direction for equities in the Asian session. A strong Australian GDP report has lifted AUD/USD further overnight, while USD/CAD came under pressure yesterday after dire GDP figures. The latter puts some pressure on BoC ahead of the rate decision this afternoon but we still look for unchanged rates today. The oil price continues to edge lower as market attention is drawn to the OPEC meeting on Friday: the cartel looks set to keep production at elevated levels and thus likely to offer little respite to a still well-supplied market. Brent is now not far from the August low (42.70), which could be broken if OPEC keeps the price war alive and EUR/USD takes another dive on ECB-Fed near term.

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