The euro may not be the day's biggest mover but it is certainly the market's center focus because for the second day in a row better than expected German data prevented EUR/USD from falling further. If there were one thing that could change the ECB's mind about easing, it would be an improvement in the region's largest economy. In contrast to the U.K. who is suffering from a strong currency, the Eurozone is benefitting from a weak euro. German manufacturing activity and business confidence improved in the month of November. The rise in confidence is particularly impressive considering that it comes after the VW scandal, refugee crisis and Paris attacks. It will be important to see whether this improvement can be sustained for another month but the ECB makes their decision on stimulus before seeing the next reports. Judging from the recent turn in data and ECB rhetoric, fresh stimulus will be introduced next week but the central bank's actions may less aggressive as they leave their options open to take additional steps in the months ahead if the economy worsens.
After rebounding on Monday, the U.S. dollar traded lower against all of the major currencies with the exception of the British pound. The latest round of U.S. economic reports were mixed. Q3 GDP growth was revised significantly higher from 1.5% to 2.1% but personal consumption was revised lower. House prices increased according to S&P CaseShiller but while the October trade balance narrowed, imports and exports declined. Consumer confidence also tumbled and manufacturing activity in the Richmond region contracted for the third straight month. There's certainly more negative than positive surprises, which explain the decline in the dollar but these disappointments won't stop the Fed from raising interest rates next month. The geopolitical tensions between Turkey and Russia also drove commodity prices higher and USD/JPY lower.
The best performing currency today was the Australian dollar. The recent strength of A$ has been driven entirely by central bank speak. Despite weaker data and lower commodity prices, policymakers remain optimistic about the prospects for Australia's economy. This morning, RBA Governor Stevens said Australian firms have stepped up hiring and the prospects for non-mining economy is improving. This comes after the Treasury lowered its GDP forecast for the year. Gold and copper prices rebounded slightly but remain weak overall. For the past 3 days, the AUD/USD rally stopped right around 0.7350. If this level is broken in a meaningful way, the next challenge for the currency pair will be the October high of 0.7382.
The more than 2% rise in oil prices drove the Canadian dollar higher against the U.S. dollar. As we have been saying all week, oil has and will continue to be the primary driver of Canadian dollar flows. Oil inventory data is scheduled for release tomorrow and as usual, the report will have a meaningful near term impact on the currency. Many economists have been watching the 2 year U.S. - Canadian yield spread which is close to making new highs. A strong move to the upside for the spread and a slide in oil prices would be needed to drive USD/CAD to a fresh 11 year high above 1.3457.
The New Zealand dollar also performed well today on the back of U.S. dollar weakness. The country's trade balance report is scheduled for release this evening and while dairy prices increased in October as a whole, the slowdown in the business PMI index points to weaker trade activity.
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