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Market Briefing: Currencies Rangebound As Liquidity Ebbs

Currency traders are all nestled in their spreads, with visions of sweet incomes dancing in their heads. Equities and risk-sensitive currencies are inching higher, the dollar is trading on a mixed basis against its major rivals, and Treasury yields are slightly weaker across the curve.

Japan’s yen is holding onto gains achieved on Monday when the central bank shocked markets by opting to relax its yield-suppression efforts. Even if the Bank of Japan’s policy adjustment was not designed to tighten financial conditions, the effect has been just that: two-year government bond yields are above zero for the first time since 2015, ten-years are edging closer to the new 0.50 percent cap, and markets are discounting a quarter-point hike by July.

The British pound is suffering after the Office for National Statistics said government borrowing had almost tripled in November relative to a year ago, with rising interest costs and energy subsidies driving the budget deficit further into the red. The monthly shortfall amounted to £22 billion, well above forecasts, and the highest on record. Estimates suggest that the government’s energy support measures cost around 7 billion pounds, while interest payments surged to 7.4 billion in the month as inflation rose and yields climbed.

The euro remains well-supported, with falling energy prices, improving consumer confidence numbers, and a hawkish central bank helping it maintain position against the dollar and outperform the pound. Natural gas prices are back to levels seen in June as imports surge and consumption falls. Data out yesterday and this morning showed significant improvements in consumer confidence across the euro area and in Germany. And markets expect the European Central Bank to continue tightening through the early new year, with deposit rates seen hitting 3.25 percent before plateauing.

Canadian dollar traders expect the latest inflation numbers to show a deceleration in headline price gains, but core measures are seen remaining elevated. Although markets expect at least one more quarter-point hike in 2023, the Bank of Canada has hinted that it will likely pause to take stock of changes in underlying fundamentals before taking additional action.

Data out at 8:30 is expected to show the US current account deficit widening to $222 billion in the third quarter, down from $251.1 billion in the second. With the country’s “exorbitant privilege” in global capital markets remaining unrivalled, investors simply won’t care.

The US Conference Board’s consumer confidence measure is expected to show a slight improvement in December, with economists looking for an index level near the 101.2 mark, up from 100.2 in November. We’re not so sure – we think a downside miss is possible. With gasoline prices stabilizing, inflation running well above comfort levels, and borrowing costs remaining high, growing economic uncertainty could have a meaningful impact on consumer attitudes.

Karl Schamotta, Chief Market Strategist

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