Risk appetite is ebbing once again as traders pare exposures ahead of Friday’s US consumer-price release. The dollar is climbing against all of its major peers—putting it on course for a third consecutive daily advance—benchmark ten-year Treasury yields are drifting lower as an ongoing slide in oil prices dampens inflation expectations, and futures are pointing to a softer open for US equities.

In currency markets, the euro and yen are enjoying a brief reprieve as political clouds clear. In Europe, Friday’s downgrade of France’s credit rating has barely widened bond spreads—evidence that institutional investors had largely anticipated the move and expect the government to steer a budget through before the end of the year. The euro is holding just above key support levels in the high 1.15 range. In Japan, the yen is slightly weaker after Sanae Takaichi won a lower-house parliamentary vote, paving the way for her confirmation as the country’s first female prime minister. Her victory has heightened expectations for a shift toward looser fiscal and monetary policy, although we suspect an increasingly-hostile political backdrop will limit the government’s room for manoeuvre.

The Canadian dollar, meanwhile, remains on the defensive ahead of this morning’s inflation report. According to surveys published by the Bank of Canada yesterday, business and consumer confidence improved slightly in the third quarter, but remained deeply depressed as trade policy risks darkened the outlook. Roughly one in three firms now expects a recession, a view shared by nearly two-thirds of households.

Failing a major upside surprise, we don’t think this morning’s September inflation report will materially impact the loonie’s trajectory, given that Bank officials have made it clear that growth and employment risks are now taking precedence over price pressures in driving policy. Market-implied odds on a rate cut at next week’s policy meeting are flirting with the 85-percent mark, up from less than 70 percent yesterday morning. While the Canadian dollar could benefit from a weaker greenback in early 2025, domestic fundamentals look too fragile to sustain significant gains in the near term.

Across markets, sentiment looks exceptionally fragile. The VIX index—Wall Street’s preferred gauge of volatility—has slipped back below 19, but we think last Friday’s sharp spike above 28 on relatively-narrow credit concerns should serve as a reminder of how quickly anxiety can return. Anecdotal evidence suggests that investors who have spent much of the year “buying the dip” in artificial-intelligence shares, equity indices, and gold are growing uneasy over lofty valuations, and many of them are already edging toward the exits. Although no one can predict the timing or direction, it seems likely that a regime change is coming that could upset the equilibrium in foreign exchange markets.