Dollar Gains on PBoC Rate Cut

Daily Analysis - 26/10/2015

Surprise Loosening of Monetary Policy by People’s Bank of China Boosts Equities

The Peoples Bank of China lowered its benchmark one-year lending rates on Friday from 4.60% to 4.35%, a 25 basis point rate cut, while also cutting the one-year deposit rates to 1.50%. Additionally, the reserve requirements ratio was slashed by an additional 50 basis points for banking institutions.

Dollar Supported by Weak Euro

The US Dollar gained on Friday led by a weaker Euro which fell on Draghi's dovish comments during the ECB's press conference held Thursday following the interest rate decision. Expectations of further easing and potential for another deposit rate cut have seen the Euro tumble lower versus peers. When combined with a surprise rate cut from the PBoC which delivered rate cuts across the board. The Dollar was trending stronger by late Friday on the heels of these developments. EURUSD continued to fall, closing Friday at 1.1010 after having broken the major trend line, with further decline expected towards support at 1.0950 through 1.0880. The Euro failed to recover despite better than expected flash PMI numbers on Friday. On a weekly basis, EURUSD has confirmed a bearish reversal and looks poised for a further decline early into this week.

Canada CPI Mixed

Consumer inflation in Canada for the month of September proved mixed after the core CPI increased less than expected, printing at 0.20% while the headline CPI declined -0.20%. On an annualized basis, inflation increased 1.00%, posting a slowdown from 1.30% in August. Lower gasoline prices were seen as the major reason for subdued inflation with most of the other major components experiencing a marked increase including food prices, which were up 3.50% year over year. Core inflation in Canada is expected to remain around the 2.00% target range into the end of the year with forecasts showing headline inflation would follow suit. The US Dollar closed the week at 1.3166 against the Canadian dollar with Friday’s session posting a bullish engulfing candlestick indicating further upside in the near-term. USDCAD’s price action last week saw the pair recover nearly two of the last three weeks of declines since September 27^th.

S&P 500 Manages 4^th Week of Gains

The S&P 500 index closed the prior week on a bullish note, marking a fourth straight week of gains after prices tested the lows of 1865 around the week of September 27^th. Market expectations for the direction of the trend are upwards for the S&P 500, which managed to close above the 200-day moving average for the first time since August 19^th. As the US earnings season gets into full swing, major technology companies including Twitter and Apple are among the notably publicly traded entities due to report their earnings over the week. The S&P 500 touched a record high at 2132 during May of this year, but based on the outlook for the Federal Reserve, equity markets could come under pressure in advance of the upcoming FOMC meeting October 28^th.

Slow Start to Markets

The economic calendar today is relatively light in comparison to the big events scheduled for later in the week. The German Ifo Business Climate index is due early in the session with estimates pointing to a soft 107.8 reading, down from 108.5 in the prior period. The German Bundesbank is also set to release its monthly report later during the day. Germany's economic activity has been slowing down over the past few months with export orders declining sharply alongside lack of any upside progress on inflation. Friday's Euro Area flash PMI numbers managed to beat estimates, but business confidence in the Euro Area remains subdued in light of global economic headwinds. The EURGBP currency pair fell to a one-month low on Friday, trading near 0.7160 before pulling back higher towards to the end of the session to close at 0.7193.