Signs of a thaw in US-China relations and more evidence of a dovish shift in the Federal Reserve’s messaging on rates are giving currency markets an opportunity to trade against the US dollar this morning. Equity futures are setting up for a strong open, yields are down, and commodities are gaining across the board.

The greenback is down against most of its major counterparts after US president Joe Biden and Chinese general secretary Xi Jinping agreed to resume cooperation on a number of fronts, helping to reduce pressure on the yuan and weaken safe haven demand for the dollar. After a meeting on the sidelines of the G20 meeting in Bali, Biden, who in many ways has pursued a more hawkish approach than his predecessor, said “I’m not suggesting this is kumbaya,” but “there need not be a new Cold War”. Chinese Foreign Minister Wang Yi said the discussion marked a “new starting point.”

At a Bloomberg panel event yesterday, Federal Reserve Vice Chair Lael Brainard suggested the central bank would begin to slow the pace of rate increases at its December meeting. The highly-influential member of the bank’s rate-setting committee noted encouraging signs in last week’s consumer price data, and pointed to evidence of a moderation in wage growth, suggesting that a slowing economy and the Fed’s policy changes were taking effect. She said “By moving forward at a pace that’s more deliberate, we’ll be able to assess more data and be better able to adjust the path of rates to bring inflation down,” but left terminal rate expectations in markets largely unchanged by saying “We have additional work to do”.

The euro and pound continue to gain strength after having broken through a number of key technical levels over the last week. Moves this morning were largely dollar-driven, but higher-than-expected wage pressures in the UK, and an improvement in German investor confidence are helping to lift both currencies to higher altitudes.

Japan’s economy surprised forecasters last night, shrinking -1.2 percent in the third quarter instead of expanding by the expected 1.2 percent. Net exports turned negative, with a slumping yen helping boost import bills, and most other growth components coming in weaker than expected. Economists are more optimistic on the fourth quarter, with falling energy prices, easing coronavirus restrictions, and generous government stimulus spending helping to boost output.

Chinese retail sales, a critical measure of domestic consumer spending, fell 0.5 percent in October from a year earlier, according to the National Bureau of Statistics. Industrial production rose just 5 percent year-over-year and fixed asset investment climbed 5.8 percent, further illustrating the impact ongoing coronavirus lockdowns and slackening global demand are having on the economy.

In today’s data docket, US producer prices are seen rising 0.4 percent from the prior month, continuing to decelerate as input costs come down and final demand weakens.

Fed speakers include Harker, Cook, and Barr. Harker’s comments on the economic outlook could prompt small market perturbations, but Cook and Barr are speaking on topics of less relevance for exchange rates. Barr, as Vice Chair for Supervision, will likely face questioning on the ongoing implosion in crypto markets.

Statistics Canada will report October inflation data tomorrow, with investors expecting a slight rise from September’s print. Rebounding gasoline and still-firm food prices are thought to have lifted the headline index to a 7 percent year-over-year gain, up from 6.9 percent in the prior month. This should leave expectations for a quarter-point move at the Bank of Canada’s December meeting intact – but if last week’s US data are any indication, methodological quirks could see the release triggering a reaction in rates markets.

Karl Schamotta, Chief Market Strategist