The almighty greenback is holding near its highest levels since March this morning as rising oil prices and slower disinflation fears force Treasury yields upward. The major North American equity bourses are under pressure and risk-sensitive currencies are licking their wounds. 

Half-hearted defence efforts from policymakers are doing little to reverse the tide. The euro is up just 0.2 percent after European Central Bank Governing Council member Klaas Knot warned markets could be “underestimating” the likelihood of a rate hike at next week’s meeting, and his colleague Peter Kazimir said he would prefer to “deliver another 25 basis points” and “take a breather thereafter”. Both the onshore and offshore Chinese yuan are trading north of the 7.30 mark even after the official renminbi fix was set well above market consensus last night. And the yen is trading essentially flat despite Japanese vice finance minister Masato Kanda’s warning that the government wouldn’t rule out any options in dealing with “speculative action” in the foreign exchange markets – language that has historically preceded direct currency intervention. 

The Canadian dollar remains soft as markets prepare to ignore the Bank of Canada’s “higher for longer” message in a few hours. With the economy slowing, labour market conditions easing, and other portents suggesting that inflation pressures will subside in coming months, investors are growing more convinced the Bank’s tightening cycle is done, and are now mainly concerned with adjusting bets on when the first rate cut might occur. 

Crude oil prices remain near the highest levels since last November after both Saudi Arabia and Russia said they would extend production cuts to the end of the year. In yesterday’s clearly-coordinated announcements, Riyadh and Moscow warned that they would keep a combined 1.3 million barrels a day in output off global markets till December, surprising participants who had expected a one-month rollover in supply restrictions. Although both global benchmarks have slipped somewhat, Brent is going for almost $90 a barrel, while West Texas Intermediate is exchanging hands for $86. 

Against this backdrop, a kind of “doom loop” threatens to unfold in global markets, with higher oil prices forcing the Chinese, Japanese, and European economies further into remission, further burnishing the largely energy-independent US economy’s safe haven credentials. The dollar could continue its rally, putting renewed pressure on trade volumes and asset prices in the rest of the world. 

We think US economic surprise indices will continue softening incoming weeks, with consumer spending and labour market data series underperforming more profoundly relative to overly-optimistic market expectations. If we’re right, the “American exceptionalism” trade should falter, sending the greenback lower on a broad-based basis and offering global asset prices a modest degree of relief. But we could be wrong – and even if we aren’t, volatility levels seem likely to rise.