Global Themes

The U.S. dollar was the highest flyer Friday after constructive news from Washington kept hopes alive for economy-boosting tax reform in the months ahead. The dollar gained against the euro and climbed to its highest in three months against the yen. The greenback was little changed against the loonie ahead of big data today from Canada on inflation and retail sales. The U.S. Senate overnight backed a budget deal that brought the Trump administration a step closer to advancing tax reform, a core tenet of the president’s agenda aimed at helping the economy shift into a higher gear that has long proven elusive. The greenback notched a new 5-month high versus the politically-injured New Zealand dollar, and moved in closer range of multimonth peaks against its Swiss, South African and Mexican peers. Better economic news is expected today from Canada which if realized could boost the loonie.

GBP

Sterling slid to two-week lows against the dollar early Friday but stabilized after finding technical support. A bad week for the U.K. economy has taken a toll on sterling sentiment and raised the bar a bit to a near-term rate hike by the Bank of England. Retail sales plunged nearly a percent, with consumers squeezed by high inflation and lackluster pay growth. The odds of a Nov 1 rate hike by the BOE to 0.50% from 0.25% have narrowed to 66% from 80% earlier in the week. It wouldn’t be totally out of the question for the BOE to hold fire on a rate hike next month given the fragile shape of the economy. Key to Britain’s rate debate will be third quarter GDP on Oct 25 that’s forecast show growth holding at a low 0.3% rate for a second straight quarter.

USD

A feisty dollar climbed toward the top of its range as constructive news from the nation’s capital triggered a rally. Washington moved a step closer to tackling tax cuts, a chief tenet of the president’s agenda to help juice the moderately growth economy. Treasury yields jumped on the news, a key driver of greenback sentiment. Still, gains have proven tough to sustain for the buck given scant inflation that suggests limited scope for the Fed to raise borrowing rates. The dollar will take its cues next week from data Wednesday on durable goods and Friday when the initial estimate of third quarter growth arrives. The blow to the economy from the hurricanes is expected to cause Q3 growth to slow to a 2.6% annual rate from a 3.1% pace in Q2.

NZD

The kiwi dollar fell into a deeper hole overnight when it clocked a fresh 5-month trough. New Zealand’s incoming prime minister is Jacinda Ardern of the Labour Party which spells uncertainty after a decade of conservative rule. Labour’s coalition government is perceived as less business friendly than the last administration, while markets are also unnerved by Ms. Ardern’s ambitions to curb immigration and limit foreign investment all of which could take a toll on growth.

CAD

The loonie tumbled to session lows after mixed data on the northern economy effectively closed the door to a rate hike next week. As expected, inflation rose at an annual rate of 1.6% in September which was up from 1.4% in August but still south of the Bank of Canada’s 2% sweet spot. The news on the consumer was disappointing as retail sales unexpectedly fell 0.3% in August, missing forecasts by a longshot of a 0.5% rise. The data on balance was consistent with Canada’s economy coming off a boil which casts doubt on the need for higher lending rates in the months ahead. The BOC is expected to leave its key interest rate unchanged at 1.0% when it issues its policy decision on Oct. 25 at 10 a.m. ET.

EUR

The euro weakened as uncertainty undercut the single currency, while reassuring news from Washington buoyed the greenback. The euro kept to a confined range with upside capped by political risk in Spain and downside limited by expectations for the ECB to soon taper its lavish monetary stimulus. The coming week is arguably the one that euro bulls have anticipated all year. The central bank issues a policy decision on Oct. 26 at which it is expected to announce plans to dial back on stimulus with the economy enjoying a relative boom. If the ECB merely meets expectations, it would run the risk of disappointing euro bulls who are hoping for a hawkish outcome.

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