Market Briefing: Currencies turn more buoyant in the calm after the storm
Financial markets are adding risk after last week’s unusually-eventful week for macroeconomic developments. Equity futures are climbing, bond yields are holding steady, and the dollar is losing altitude as expectations for Federal Reserve policy begin to stabilize in response to Chair Jerome Powell’s “slower-but-higher” message at Wednesday’s meeting, and after Friday’s stronger-than-expected employment data.
After Jerome Powell warned markets not to expect a pause in the months to come, investors expect the Federal Reserve to deliver another half-percentage-point hike in December, with the upper end of the Fed Funds target range climbing to 5.25 percent by mid-2023.
The offshore Chinese yuan is licking its wounds after another weekend of whiplash price action. The dollar-renminbi pair suffered several violent round-trips in the last week on renewed rumours of an imminent relaxation in the “covid-zero” policies that have hobbled the country’s economy - but a briefing from top public health officials on Saturday poured cold water on the prospect, with officials promising to “unswervingly” continue following draconian protection protocols.
In depressing news for the global demand for the global demand outlook, China’s exports shrank 0.3 percent year-over-year in October, the weakest growth since the pandemic reached its depths in early 2020.
The euro and pound are steadily rising as bearish narratives lose strength. Energy prices are coming down and the economic outlook is brightening (albeit from incredibly depressed levels), opening up buying opportunities for those brave enough to capture them. Speculative positions - as measured using the CFTC’s commitment of traders report - have turned in the direction of further gains, with traders adding long positions on the euro and cutting short bets on the pound in the week ended last Tuesday.
The Richmond Fed’s Thomas Barkin will discuss the inflation outlook at 6 pm, but there are no major data releases scheduled for today.
Canada’s economic calendar looks bare for the whole week - but that isn’t likely to lower volatility in the Canadian dollar. The loonie has tracked the S&P 500 more closely than domestic data prints, Bank of Canada policy decisions, or oil prices in recent months, and bullish momentum could see the currency tack on further gains in the days ahead.
Americans head to the polls tomorrow to determine the composition of the 118th US Congress. Early results could skew Democratic as mail-in ballots are counted, but recent polling suggests the Republicans will ultimately prevail, taking control of both the House and Senate. This is expected to create political gridlock, with the Grand Old Party acting to frustrate any major economic initiatives launched by the Biden administration - even during a downturn - but this is arguably priced in, and markets generally welcome periods in which the executive branch faces constraints on its power.
The Biden administration is reportedly examining ways to raise the debt ceiling before the end of the year, fearing that Republican brinkmanship over the issue could send the economy into a tailspin in late 2023. Several conservative lawmakers have already threatened to use the issue as a bargaining chip, and high inflation rates have turned government spending into a hot-button issue. But there’s no evidence the debt limit meaningfully induces fiscal restraint - it has been raised 49 times under Republican presidents and 30 times under Democratic presidents in the last fifty years, and both parties have continued policies that contribute to wider deficits.
Thursday’s October consumer price index release looms as the week’s most likely volatility catalyst. A number of methodological quirks could play havoc with the data, but headline prices are seen climbing 0.6 percent month-over-month as rebounding gasoline and higher food costs keep the all-items measure running at 7.9 percent year-over-year. A moderation in both goods and services categories is expected to weaken core inflation, with a 0.4-percent month-over-month print marking a deceleration from 0.6 percent in September.
Note: Our apologies for the interruption in service on Thursday and Friday - aircraft wifi, airline confusion, and bad weather contrived to make it impossible to send emails.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
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