Soft Signals

Soft US economic data sent incorrect signals over the past year but the mounting strength of survey data is increasingly difficult to disregard. For the second day in a row both the pound was the leader and the loonie was the laggard. Higher than expected employment figures and lower than expected jobless rate from New Zealand gave the kiwi a much-needed respite. The FOMC decision is due on Wednesday. The Dow "divergence" addressed in today's Premium video (below) has grown deeper today, setting up for suitable 2nd-half-of-the-week.

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How strong is the US economy? If the consumer confidence survey from The Conference Board is an indication, it's at the best level since December 2000. The index hit 125.9 in October compared to 121.3 expected. Manufacturing sentiment is also bubbly with the Chicago PMI rising to 66.2 compared to the 61.0 consensus. That's the best since March 2011.

The reports are a continuation of a string of solid data points that are simultaneously turning higher. Combine that with optimism about a tax cut and the US dollar is in a sweet spot.

USD/JPY climbed a half-cent on Tuesday as October came to a close. The pound also continued to benefit from speculation that Carney will hike this week with the possibility of hawkish commentary.

USD/CAD jumped after Canadian GDP contracted 0.1% in August compared to +0.1% expected. Poloz also reiterated that inflation risks are balanced and that the BOC will be cautious going forward. That virtually rules out a December rate hike.

Wednesday's FOMC decision is largely seen as a non-event but we think that's a mistake. The market is pricing in just a 0.8% chance of a hike and while it's still remote, the possibility of a hike is higher than indicated. Yellen may decide she doesn't want to hamstring her successor into only raising rates at meetings with a press conference.

Still, what's most likely is a continued pledge to gradually hike rates with hints of optimism on the economy but caution about the slow rise of inflation. That should be enough to keep a bid in the dollar.