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Currencies mark time ahead of non-farms

Traders are keeping powder dry ahead of this morning’s critical non-farm payrolls report. Equity futures are flat-lining, Treasury yields are holding near three-month lows, and all of the major currency pairs are caught within tight ranges.

Consensus forecasts collected by Bloomberg and Reuters suggest the US added roughly 190,000 jobs in November – down from 150,000 in the prior month – but a growing sense of economic pessimism has likely left markets positioning for a softer print. The unemployment rate could rise to 4.0 percent, but on a three-month averaged basis is likely to remain below the level needed to trigger the ‘Sahm Rule’ which typically indicates a recession has gotten underway.

The Japanese yen remains a focal point, tumbling overnight amid a flurry of trading activity. Comments from Deputy Governor Himino and Governor Ueda earlier in the week touched off speculation the Bank of Japan could lift rates into positive territory at its mid-December policy meeting, but investors are turning (justifiably) more sceptical. The case for a sustainable increase in inflation is difficult to see, and data out last night showed growth contracting at an annualized pace of 2.9 percent in the three months through September from the previous quarter as households cut spending – hardly indicative of an economy needing tighter policy settings. We expect an eventual escape from the zero bound, but think a move in the next fiscal year – after April – is most likely.

The Canadian dollar remains on the weaker end of its trading band after a senior Bank of Canada official said the economy “no longer looks to be in excess demand,“ but policymakers need to “see further progress“ on inflation before providing interest rate relief. In an appearance focused largely on housing and inflation yesterday, Deputy Governor Gravelle noted that markets had “been right” in assessing the direction of policy over the last few meetings, saying participants were “taking in data the same way we are” – language that suggests policymakers are fairly comfortable with current market expectations for aggressive rate cuts in 2024. Paired with our growing conviction in a Canadian recession, this puts the currency on a glide path lower into next year – provided the big dollar doesn’t suffer an unruly unwind in the interim.

Next week will be big for markets, with the US dropping key inflation and retail sales numbers, while the Federal Reserve, Bank of England, and European Central Bank deliver their final rate decisions for the year. With investors overwhelmingly crowded into trades designed to profit from a rapid pivot to rate cuts, an overly-hawkish tone to policy communications could trigger some year-end position adjustment and potentially bolster the dollar.

TUESDAY

Experimental data is expected to show UK unemployment holding at 4.2 percent in the three months to October, with wage growth cooling from 7.7 to a still-high 7.5 percent year-over-year. This won’t give the Bank of England enough room to begin a dovish pivot. (02:00 EDT)

Consumer price growth likely continued to cool in the United States last month, helping ratify expectations for a prolonged hold from the Federal Reserve. Consensus estimates suggest headline inflation remained flat on a month-over-month basis in November, with tumbling energy costs helping bring the year-over-year rate down to 3.1 percent from 3.2 percent. The core measure could appear more stubborn, holding near the 4 percent threshold year-over-year, but this will be somewhat deceptive: in the last six months, ex-food and energy prices have risen less than 3 percent on an annualized basis. (08:30 EDT)

WEDNESDAY

The Federal Open Market Committee will almost certainly leave rates unchanged for a third consecutive meeting, but the accompanying economic projections could shift considerably, impacting financial market assumptions. Turbulence could be unleashed across a number of asset classes if the “dot plot” fails to reveal a dramatic 75-basis-point drop in the median forecast for end-2024 policy rates – or, if the number of expected rate cuts exceeds what is currently priced in. We’re not sure whether Governor Waller’s perspective—that the Fed should begin providing accommodation once inflation has fallen for a three- or four-month period, even if the underlying economy remains strong—is widely shared across the committee, and suspect some policymakers are still clinging to the “higher for longer” message that seemed so fashionable a few months ago. Either way, the potential exists for considerable volatility. (14:00 EDT)

THURSDAY

With key inflation metrics remaining far from target, the Bank of England is likely to maintain a rhetorically-hawkish bias at its December meeting, retaining the option to raise rates again if price growth fails to continue its descent. Policymakers could choose to buck global trends in decisively pushing back against the easing in financial conditions that has occurred since October, but in the UK, as elsewhere, markets are unlikely to take this seriously. Global investors believe inflation is on the wane, with interest rates expected to follow suit, and there’s simply not a lot policymakers can do to convince them otherwise. (07:00 EDT)

Virtually no one thinks the European Central Bank will raise borrowing costs again in this tightening cycle, yet there’s significant disagreement around how quickly and aggressively policymakers will begin cutting interest rates next year. Inflation is subsiding quickly and recent commentary from Governing Council members—most influentially, Isabel Schnabel—has turned remarkably dovish, convincing markets to assume at least five rate cuts through the course of 2024. We think price growth could make a modest comeback in the early new year as government energy caps expire, and suspect investors expect too much flexibility from a notoriously slow-moving institution. (08:00 EDT)

Control-group retail sales – critical in assessing the strength of US consumer demand – are seen eking out a small gain in November, rising just 0.1 percent month-over-month on a comparatively anemic increase in holiday outlays. But American households remain the most powerful force in the global economy, and we don’t rule out another month of growth-defying spending. (08:30 EDT)

The Banxico should follow through on its forward guidance, holding its benchmark rate at 11.25 percent for a sixth consecutive meeting. Although the economy is showing signs of vulnerability as the US begins to slow, the first rate cuts are expected to begin late in the first quarter, and are seen coming incrementally so that interest differentials with the Federal Reserve remain strongly positive – meaning that carry traders should remain confident in high returns for now. (14:00 EDT)

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