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Trump-Democrats' Deal Lifts Sentiment, Containing USDCAD's Decline Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Wed Sep 06 17 22:51 ET

There are several surprises that rocked the market. First, the BOC unexpected raised the policy rate by +25 bps to 1%. Second, US President Donald Trump sided with the Democrats and reached a deal to extend the debt ceiling alongside provision of aids for the victims of Hurricane Harvey. Third, Vice Fed Chair Stanley Fischer announced that he would resign his position, due to personal reasons, from on or around October 13. His resignation offers a chance for Trump to shape the central bank. Canadian dollar rallied to a 2-year high against US dollar after the rate decision. USDCAD slumped to as low as 1.2134, before ending the day at 1.2223, down +0.88%. While USD was mixed against major currencies (rising against JPY and AUD, but falling against EUR, GBP, NZD, etc), US treasury yields and stocks strengthened. 2-year yields gained 1 point to 1.306% while 10-year yields rose 4 points to 2.105%. Wall Street climbed higher with the DJIA and S&P 500 indices gaining +0.25% and +0.31% respectively. In the commodity sector, energy prices rose with the exception of gasoline. The front-month WTI and Brent crude oil contract gained +1.03% and +1.54% respectively. The front-month contract for heating oil added +0.66% while that for RBOB gasoline slipped -1.52%. The path of Category 5 Hurricane Irma, headed for Florida, should be closely watched. Precious metals fell across the board on diminished safe haven demand.

BOC

BOC increased the policy rate by +25 bps to 1% in September, following a rate hike in June. Policymakers cited the better-than-expected economic developments as a key reason for the removal of stimuli from the market. However, they remained cautious over a number of issues including excess capacity, subdued inflation, geopolitical risks and the strength in Canadian dollar. The central bank stressed that further monetary decision is "not predetermined" and "will be guided by incoming economic data and financial market developments as they inform the outlook for inflation". The progress of NAFTA renegotiations, the inflation outlook, the housing market developments and the Fed's balance sheet reduction would be key factors driving BOC's future monetary policy.

US Debt Ceiling

Trump reached a short-term deal with Democrats, despite opposition from Republicans, to extend the US debt limit, providing government funding for three months until December 15. The deal would also provide financial relief to victims of Hurricane Harvey. Shortly before the meeting, Republican House Speaker Paul Ryan called the Democratic proposal a "ridiculous and disgraceful" idea that would "play politics with the debt ceiling". The bill is due to pass in the Republican-controlled Congress and Senate.

Fed's Stanley Fischer Resigns

Fischer noted that he has submitted his resignation as vice-chairman of the Federal Reserve due to personal reasons. Fischer is classified in the hawkish camp and he is an opponent of Trump's proposal to deregulate the financial markets.

Oil Inventory

The immediate impact of hurricane Harvey is seen in the latest oil inventory report. The industry-sponsored API estimated that crude oil inventory gained +2.79 mmb in the week ended September 1. For refined oil products, gasoline stockpiles dropped -2.54 mmb, less than expectations of a -5 mmb decline, while distillate slipped -0.3 mmb. The EIA report probably shows a +4.02 mmb increase in crude oil inventory. Gasoline stockpile probably dropped -5 mmb while distillate was down -3.06 mmb.

ECB

Today's focus is undoubtedly the ECB meeting. However, we believe the central bank to maintain the rhetoric that "the net asset purchases, at the current monthly pace of 60B euro, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". Policymakers would also warn of currency appreciation. At the Q&A session, Draghi would probably stay neutral in the tapering schedule. We expect QE tapering announcement would be made in October. The staff would also publish the latest economic projections alongside the meeting statement.

 

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