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Dollar fades ahead of Fed minutes

The dollar keeps slipping, slipping, slipping into the future. With this afternoon’s Federal Reserve meeting minutes expected to confirm an increasingly-dovish consensus among policymakers, the greenback is trading near its August lows, down almost 3 percent on a trade-weighted basis this month. The record of deliberations leading up to the central bank’s early-November decision is likely to show officials seeing growth and inflation risks as more “balanced,” with “many” or “most” participants seeing rates as “near, or already at a sufficiently restrictive” level – language that should bring market-implied odds on a final rate hike down to near zero.

The trend is your friend: In unwinding “US exceptionalism” trades and betting on a rapid series of rate cuts in 2024, market participants have poured rocket fuel into global asset classes, giving emerging market currencies and equity markets room to outperform. We think this portfolio rebalancing process could unfold for several months yet.

But beware the bend at the end: Hugely US-positive rate differentials should ultimately cap rest-of-world gains and mitigate the risk of a disorderly decline in the dollar – and a more profound economic shock could easily prompt a rally in the currency.

The pound is grinding higher, pushing above the 1.25 mark against the dollar after Bank of England Governor Bailey warned markets against betting on a rapid drop in inflation rates. In parliamentary testimony, Bailey suggested “too much weight” was being given to the trend in recent reports, saying “We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to two percent. And I think the market is underestimating that”. His comments come after Chief Economist Huw Pill had flagged a “sharp drop” in price pressures ahead of last week’s October inflation report, implying that rate cuts by mid-2024 were a “reasonable” assumption.

The Canadian dollar is basically unchanged as traders prepare to snooze through the October inflation report. Softening base effects and falling energy costs are seen pulling price growth back toward the Bank of Canada’s target zone, while a steadily-weakening outlook for consumer spending and business investment is expected to limit the risk of a re-acceleration in the months ahead. Policymakers should remain sidelined, with changes in global risk appetite retaining greater influence over the exchange rate than any shift in monetary policy expectations.

TUESDAY

Canadian all-items inflation likely continued its deceleration in October, with consensus estimates suggesting prices rose 3.1 percent year over year, down from 3.8 percent in September as global energy prices fell. An average of the Bank of Canada’s two preferred measures – median and trim – might have pushed slightly higher to 3.2 percent, but with soaring mortgage costs doing much of the heavy lifting, markets and policymakers should remain convinced of a prolonged hold from the central bank. (08:30 EDT)

A record of the Federal Reserve’s early-November decision should bear the imprint of a more cautious approach from policymakers, helping provide context for Chair Powell’s mildly dovish performance during the post-meeting press conference. We think officials likely emphasized signs of slowing momentum in the economy, worried that a blockbuster third-quarter jump in gross domestic product wouldn’t be repeated, and discussed the role markets were playing in tightening overall financial conditions before concluding (in carefully-hedged language) that a final rate hike could prove unnecessary. (14:00 EDT)

The Canadian government’s fall economic update will lean heavily on initiatives to boost housing supply, but a substantial increase in deficit projections could steal most of the thunder. With slowing growth nibbling at revenues while rising interest rates and prior spending promises eat purchasing power, observers are braced for a $5-to-10 billion dollar increase relative to last year’s estimates. This isn’t likely to move the exchange rate or make Canada a pariah on bond markets – interest expenses will remain small as a share of gross domestic product, and the country’s public finances are in good shape relative to its peers – but more restrained spending could act as a drag on the economy in the year to come. (16:00 EDT)

WEDNESDAY

With orders for Boeing aircraft halving from September levels, markets think durable goods orders fell at least 3 percent last month – but a slightly more attractive picture should emerge below the headline level. Consensus suggests orders with transportation excluded rose 0.2 percent in October after climbing 0.4 percent in the prior month as businesses slowed spending on plant and equipment. (08:30 EDT)

Initial jobless claims likely jumped again last week as seasonal adjustment factors played their typical role, but the four-week moving average should also show signs of emerging weakness in the labour market. (08:30 EDT)

THURSDAY

US markets are closed in observance of the Thanksgiving holiday.

FRIDAY

Canadian retail sales probably flatlined in September – as per Statistics Canada’s advance estimate – before falling into negative territory in October. After a remarkably long delay, households are likely beginning to turn more cautious as they are squeezed by slowing wage gains, ebbing excess savings, weakening wealth effects, and a drastic rise in borrowing costs. We expect more of the same in the coming months (excepting the typical holiday-related bacchanalia) and think dropping consumption levels will drag overall growth levels down in the new year. (08:30 EDT)

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