The thinness of the order-driven capital markets is making price action that seems more inexplicable than usual. The US dollar is mixed. It has recouped all the ground it lows against the euro yesterday, as the single currency briefly dipped below $1.09 in the North American morning. It was unable to build on yesterday’s gains that had carried it up to almost $1.0950. Despite some fraying, the $1.08-$1.10 trading range still seems intact.  

Sterling which had been sold to eight-month lows at almost $1.48 has bounced to $1.49 despite more concerns after Q3 GDP was revised lower (2.1% year-over-year from 2.3%) that growth is fading. The decline in tax receipts that is producing the deficit-overshoot (discussed here yesterday).

There is a bit of a role reversal within the dollar-bloc. The Australian and New Zealand dollar’s are seeing gains over the past couple of sessions pared while the Canadian dollar is drawing some benefit from firmer oil prices. Canada’s data was disappointing, and the risk that the Bank of Canada responds with another rate hike in 2016 should rise. The US-Canadian two-year swap rate (interest rate differential) is making new multi-year highs today.  

After an unexpected contraction in September (-0.5%), the Canadian economy was forecast to recover in October. Today Canada reported that October GDP was flat. Monthly GDP in Canada has been above zero only in three of the first ten months this year. The year-over-year contraction of 0.2% was also more than the market expected and is the weakest figure since 2009. October retail sales also disappointed. The 0.1% increase was supposed to have been 0.4%. Excluding autos, retail sales were flat. The smaller than initially reported decline in September retail sales is insufficient to allay concerns about the Canadian economy.  

The Canadian dollar was off more than 4% this month coming into today’s session. The push of the US dollar below CAD1.39 for the first time this week appeared to have triggered stops and some initial follow-through selling. This is more about positions and thin markets than a fundamental reassessment of the two key drivers of the Canadian dollar oil prices and interest rate differential with the US.