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The Canadian economy contracted 0.1% month-on-month in August.

The declines were fairly concentrated, as 12 of 20 major industries (representing about 60% of output) expanded during the month.

Indeed, it was the goods sector that held things back again in August, contracting 0.7% with all major sectors reporting a contraction in output. Manufacturing saw the largest decline, with chemical manufacturing particularly weak (recording the largest decline in 20 years, per Statistics Canada), reflecting both plant maintenance and softer export demand. Elsewhere, mining, quarrying and oil and gas recorded a third month of declining output. This was largely attributable to declines in convention oil and gas extraction resulting from maintenance shutdowns in Newfoundland and Labrador.

In contrast, the stalwart service side of the economy notched up a 17th straight month of expansion. Arts and entertainment (+0.7%) and wholesale trade (+0.4%) led the way. Of note, the real estate and rental/leasing sector gained 0.2% in August, as activity at real estate agents and brokers ticked up 0.3%, breaking a four month streak of declines.

Key Implications

Notch this one up for the Bank of Canada. With a number of shutdowns in the goods producing side of the economy leading to a modest contraction, third quarter growth is now tracking around 1.9% - in line with the Bank of Canada's forecast in last week's Monetary Policy Report.

With much of the Q3 weakness seemingly down to temporary factors, and growth still tracking above potential, there is no reason for Canadians to worry. Indeed, although there remain some wildcards, such as the impact of a strike in the auto sector, it is likely that output will come back to life in coming months, particularly given still encouraging signs from labour and housing markets.

For the Bank of Canada, as encouraging as it will likely be to see their near-term outlook confirmed, "data dependency" likely implies that they will want ongoing confirmation of their expectations, particularly the expected tick-up in growth in the fourth quarter. Such an outcome appears likely at this juncture, but requiring confirmation means that the most likely trigger point for the next rate increase remains January.

Dollar is trying to regain upside momentum in early US session after positive economic data. But it's being overwhelmed by Sterling and struggles against Euro. US Employment cost index rose 0.7% in Q3, in line with expectation. Meanwhile, in annualized term, employment cost rose 2.5%, hitting a nine-year high. Wages as 70% of employment cost rose 0.7% in Q3 while benefits rose 0.8%. Steady rise in labor costs and wage is supportive to more rate hike by Fed to prevent the economy from being overheating. S&P Case-Shiller 20 cities house price rose 5.9% yoy in August.

The greenback is also supported by talks that US President Donald Trump will announce, on Thursday, to nominate current Fed Governor Jerome Powell to succeed Janet Yellen as Fed chair after next February. Powell is seen as a more hawkish policy maker than Yellen and could speed up Fed's tightening pace.

On the other hand, Canadian Dollar weakens again after GDP showed -0.1% mom in August, below expectation of 0.1% mom rise. IPPI dropped -0.3% mom in September versus expectation of 0.5% mom. RMPI dropped -0.1% mom versus expectation of 0.4% mom rise.

Eurozone growth strong, but inflation sluggish

Euro lacks a clear direction today after mixed economic data that show solid growth but sluggish inflation. Eurozone GDP growth slowed to 0.6% qoq in Q3, down from upwardly revised 0.7% qoq, beating expectation of 0.5% qoq. Annualized, Eurozone economic expanded by 2.5%, highest since 2011. Unemployment rate dropped to 8.9% in September, beating expectation of 9.0%. That's the lowest level in nearly 9 years since January 2009.

However, headline CPI slowed to 1.4% yoy in October, down from 1.5% yoy and missed expectation of 1.5% yoy. Core CPI slowed to 0.9% yoy, down from 1.1% yoy and below expectation of 1.1% yoy. The set of data gives a nod to ECB's plan in tapering asset purchase. But sluggish inflation also supports ECB's cautious stance in keeping options open for extending and expanding asset purchases again.

BOJ left stimulus unchanged, downgraded inflation forecasts

BoJ again voted 8-1 to leave the monetary policies unchanged today. The targets for short- and long-term interest rates stay at -0.1% and around 0%, respectively while the guideline for JGB purchases remains at an annual pace of about 80 trillion yen. Again, BoJ revised lower its inflation forecasts for FY 2017 and FY 2018 but maintained that for FY 2019. The central bank upgraded the GDP growth outlook for FY 2017 while leaving others unadjusted.

The new member Goushi Kataoka  was the lone dissent as he voted against the yield curve control measure for two meetings in a row. He judged that 'monetary easing effects gained from the current yield curve were not enough for 2% inflation to be achieved around fiscal 2019'.

At the press conference, Governor Kuroda defended the yield curve control policy and the 2% target. As he suggested, the "main objective is to achieve 2% inflation and stably maintain price growth at that level. There's no change to our view that monetary policy must be guided to achieve this objective' and there is no need to change the yield targets".

More in BOJ Left Stimulus Unchanged, Downgraded Inflation Forecasts

Also released from Japan, household spending dropped -0.3% yoy in September versus expectation of 0.7% yoy. Industrial production dropped -1.1% mom versus expectation of -1.6% mom. Housing starts dropped -2.9% yoy versus expectation of -2.9% yoy.

China and South Korea to normalize relationship

China and South Korea agreed to restore normal diplomatic relationship, after a year of stand-off on South Korea's deployment of the so called Terminal High Altitude Area Defense (THAAD) system of the US. China disputed on it on worries that the powerful radar of THAAD could penetrate into its territory. South Korean Foreign Minister said in a statement today that "both sides shared the view that the strengthening of exchange and cooperation between Korea and China serves their common interests and agreed to expeditiously bring exchange and cooperation in all areas back on a normal development track."

Chinese Foreign Ministry maintained the opposition and reiterated that "China's position on the THAAD issue is clear, consistent and has not changed. But it also softened the stance and bit and hoped that South Korea would handle the issue appropriately. Overall, the news is seen as positive signal that China and South Korea are interested in improving their relationship, days before US President Donald Trump travel across the Pacific to visit the region.

China PMIs disappoint

The official China manufacturing PMI dropped to 51.6 in October, down from 52.4 and missed expectation of 52.1. Non-manufacturing PMI dropped to 54.3, down from 55.4. Overall, the data suggests that China's growth is on track to meet the government's target of 6.5% this year. Mild slowdown in manufacturing activity is seen as partly due to tighter environmental supervision, in particular in the north-eastern regions. While the stricter regulations will dampen growth in manufacturing sector, the overall impact should be negligible in the near term.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1610; (P) 1.1634 (R1) 1.1675; More...

Intraday bias in EUR/USD remains neutral for consolidation above 1.1574 temporary low. Some consolidations could be seen. But still, break of 1.1879 resistance is needed to confirm completion of the decline from 1.2091. Otherwise, near term outlook will stay bearish. Below 1.1574 will target 38.2% retracement of 1.0569 to 1.2091 at 1.1510.

In the bigger picture, rise from 1.0339 medium term bottom is seen as a corrective move for the moment. Therefore, in case of another rally, we'd be cautious on 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 to limit upside and bring reversal. Meanwhile, sustained trading below 55 week EMA will suggest that such medium term rebound is completed and could then bring retest of 1.0339 low.

Economic Indicators Update

Daily Pivots: (S1) 1.1610; (P) 1.1634 (R1) 1.1675; More...

Intraday bias in EUR/USD remains neutral for consolidation above 1.1574 temporary low. Some consolidations could be seen. But still, break of 1.1879 resistance is needed to confirm completion of the decline from 1.2091. Otherwise, near term outlook will stay bearish. Below 1.1574 will target 38.2% retracement of 1.0569 to 1.2091 at 1.1510.

In the bigger picture, rise from 1.0339 medium term bottom is seen as a corrective move for the moment. Therefore, in case of another rally, we'd be cautious on 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 to limit upside and bring reversal. Meanwhile, sustained trading below 55 week EMA will suggest that such medium term rebound is completed and could then bring retest of 1.0339 low.

USD/CHF - 0.9988

Original strategy :

Buy at 0.9915, Target: 1.0030, Stop: 0.9880

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9915, Target: 1.0030, Stop: 0.9880

Position : -

Target :  -

Stop : -

Although dollar has recovered from 0.9938, reckon 1.0000 would limit upside and near term downside risk remains for the corrective fall from 1.0038 (last week’s high) to bring retracement of recent rise to 0.9920-25 (38.2% Fibonacci retracement of 0.9737-1.0038), however, reckon 0.9905-10 would limit downside and bring another rise later, above 1.0000 would bring retest of said resistance at 1.0038, break there would extend recent rise from 0.9421 low to 1.0050-55, then towards 1.0075-80 but price should falter below 1.0100 resistance.

In view of this, we are looking to buy dollar again on pullback as 0.9915-25 should limit downside, bring another rise later. Below 0.9885-90 (50% Fibonacci retracement of 0.9737-1.0038) would defer and suggest top is possibly formed, risk test of support at 0.9869.

Daily Pivots: (S1) 1.3140; (P) 1.3177; (R1) 1.3243; More....

No change in GBP/USD's outlook as it's still bounded in range of 1.3026/3337. Intraday bias remains neutral for the moment. On the downside, firm break of 1.3026 support will resume the decline from 1.3651 and target 1.2773 key support level. This will also revive the case of medium term reversal. On the upside, in case of another rally, upside should be limited by 61.8% retracement of 1.3651 to 1.3026 at 1.3412 to bring fall resumption finally.

In the bigger picture, while the medium term rebound from 1.1946 was strong, GBP/USD hit strong resistance from the long term falling trend line. Outlook is turned a bit mixed and we'll stay neutral first. On the downside, decisive break of 1.2773 key support will argue that rebound from 1.1946 has completed. The corrective structure of rise from 1.1946 to 1.3651 will in turn suggest that long term down trend is now completed. Break of 1.1946 low should then be seen. On the upside, break of 1.3835 support turned resistance will revive the case of trend reversal and target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 .

Daily Pivots: (S1) 0.9922; (P) 0.9959; (R1) 0.9980; More....

USD/CHF is staying in consolidation below 1.0037 temporary top. Intraday bias remains neutral at this point. Deeper retreat cannot be ruled out. But downside should be contained above 0.9835 resistance turned support and bring rally resumption. Since 61.8% retracement of 1.0342 to 0.9420 at 0.9990 is already met, break of 1.0037 will turn bias to the upside for 1.0342 key resistance next.

In the bigger picture, current development suggests that USD/CHF has defended 0.9443 (2016 low) key support level again. Rise from 0.9420 could is a medium term up move and should target a test on 1.0342 high. This represents the upper end of a long term range that started back in 2015. On the downside, break of 0.9736 support is now needed to indicate completion of the rise from 0.9420. Otherwise, further rally will remain in favor in medium term.

GBP/USD - 1.3205

Original strategy :

Sell at 1.3255, Target: 1.3135, Stop: 1.3290

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.3255, Target: 1.3135, Stop: 1.3290

Position : -

Target :  -

Stop : -

As cable has maintained a firm undertone after staging a strong rebound from 1.3070, suggesting near term upside risk remains for further gain to 1.3240-50, however, as broad outlook remains consolidative, reckon upside would be limited and indicated strong resistance at 1.3279-87 would remain intact, bring retreat later, below 1.3120-25 would signal the rebound from 1.3070 has ended, bring weakness to 1.3100, then retest of 1.3070, break there would extend the erratic decline from 1.3338 to 1.3050, then towards recent low at 1.3027.

In view of this, we are looking to sell cable on further subsequent recovery as 1.3255-60 should limit upside. Only above indicated strong resistance at 1.3279-87 would abort and shift risk to the upside for the erratic rise from 1.3027 low is still in progress for further gain to 1.3300-10, then towards 1.3340-50.

Daily Pivots: (S1) 113.39; (P) 113.91; (R1) 114.20; More...

Intraday bias in USD/JPY remains neutral as consolidation from 114.44 is still in progress. Another fall could be seen. But in any case, outlook will stays cautiously bullish as long as 111.64 support holds. Decisive break of 114.49 key resistance will confirm that correction pattern from 118.65 has completed at 107.31 already. And USD/JPY should then target a test on 118.65. However, sustained break of 111.64 will argue that rebound from 107.31 has completed and bring retest of this low.

In the bigger picture, medium term rise from 98.97 (2016 low) is not completed yet. It should resume after corrective fall from 118.65 completes. Break of 114.49 resistance will likely resume the rise to 61.8% projection of 98.97 to 118.65 from 107.31 at 119.47 first. Firm break there will pave the way to 100% projection at 126.99. This will be the key level to decide whether long term up trend is resuming.

EUR/USD - 1.1635

Original strategy  :

Sell at 1.1700, Target: 1.1595, Stop: 1.1735

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.1700, Target: 1.1595, Stop: 1.1735

Position : -

Target :  -

Stop : -

Euro’s recovery after falling to 1.1574 late last week has retained our view that further consolidation above this level would be seen and corrective bounce to 1.1660-65 cannot be ruled out, however, reckon upside would be limited to the upper Kumo (now at 1.1706) and bring another decline later, below said support at 1.1574 would extend recent decline from 1.2093 top to 1.1550-55 but loss of downward momentum should prevent sharp fall below 1.1520-25 and reckon 1.1500 would hold from here.

In view of this, we are looking to sell euro on subsequent recovery as the upper Kumo (now at 1.1706) should limit upside and bring another decline. Only above previous support at 1.1725 (now resistance) would signal low is formed instead, bring retracement of recent decline to 1.1750-55 first. 

USD/JPY - 113.38

Original strategy  :

Sell at 113.80, Target: 112.80, Stop: 114.15

Position :  -

Target :  -

Stop : -

New strategy  :

Sell at 114.00, Target: 113.00, Stop: 114.35

Position :  -

Target :  -

Stop : -

As the greenback has remained under pressure after dropping from 114.45 (last week’s high), adding credence to our view that top has been made there and consolidation with downside bias remains for this fall to bring retracement of recent upmove, hence further fall to 112.70-75 (61.8% Fibonacci retracement of 111.65-114.45) is likely, however, near term oversold condition should limit downside to 112.50 and reckon previous support at 112.30 would hold from here, bring rebound.

In view of this, we are looking to sell dollar on recovery but at a higher level as the upper Kumo (now at 114.00) should cap upside and bring another decline. Above 114.20-25 would abort and signal the retreat from 114.45 has ended, bring retest of indicated strong resistance at 114.45-50 which is likely to hold on first testing.