Germany Boosts Defence Spending to 2.4% of GDP

Today's expected range for the Canadian Dollar against the major currencies:

US Dollar        1.3680-1.3930

Euro                 1.6110-1.6360

Sterling            1.8500-1.8750

WTI Oil (opening level) $63.17

The CAD/USD is opening at 1.3809 ( 0.7242 )

The Canadian Dollar has eased back against the US Dollar heading through the midweek, sending USD/CAD higher after a third straight bounce from a technical support zone near 1.3740. The pair is now back into a congestion point at the 50-day Exponential Moving Average (EMA) near 1.3790, and near-term price action is struggling to find meaningful momentum on either side of the 1.3800 handle.

Headlines

·    The Bank of Japan kept the policy rate unchanged, but said it could raise the policy rate this year and would begin to unwind its holdings of Japanese stock ETFs and Real Estate Investment Trusts (REIT). Benchmark 2-year Japanese Government Bond yields rose to their highest level since 2008, rising two basis points to 0.91%. The Japanese yen strengthened across the board. Initial jobless claims dropped to 231k, surpassing the consensus of 240k and down from 264k. The four-week average remained stable at 240k, while continued claims declined to 1.92 million, edging below expectations of 1.95 million. Unadjusted claims fell by 10k to 194k, exceeding seasonal projections that anticipated a 17k decrease.

·    Japan's National CPI dipped to 2.7% in August from 3.1% in July, its lowest since October 2024. Electricity and gas prices notably declined, though housing and transport costs rose. Food inflation eased slightly, with rice prices growing minimally. Core inflation matched forecasts at 2.7%, as monthly CPI rose 0.1%.

·    The Bank of England held the Bank Rate at 4.0% by a 7-2 vote, as expected, amid inflation concerns and potential demand weakness. The MPC reduced QT to GBP 70 billion, adjusting gilt sales maturity to ease Treasury pressures. The meeting awaited confirmation on inflation peaking and disinflation resuming.

·    Germany's parliament approved a transformative 2025 budget following fiscal reforms. Total investments reach €116 billion, backed by a €500 billion infrastructure fund. Defence spending, exempt from debt rules, rises to 2.4% of GDP. Finance Minister Klingbeil called it a significant shift in fiscal policy amid last year's coalition collapse. The debates for the 2026 budget are set for next week.

Key Points

·    Equities: US hit record highs as the Fed cut 25 bps and signaled more easing; Europe climbed on tech after the BoE slowed QT; Asia mixed with Japan at record highs and Hong Kong softer after the PBoC held rates

·    Volatility: VIX stable; Fed cut priced in; BoJ surprises; triple witching today; SPX ±33pt move expected

·    Digital Assets: BTC 116.9k; ETH 4.54k; IBIT/ETHA inflows; XRP and DOGE ETFs impress on launch volume

·    Fixed Income: Japanese 2-year bond yields at post-GFC highs.

·    Currencies: JPY rallies broadly on more hawkish BoJ and ahead of BoJ presser this morning

·    Commodities: Gold and silver rally. Crude oil lower as record surplus expected next year.