The dollar is creeping higher as traders begin to cut risk ahead of next week’s US consumer price report and Federal Reserve meeting. Both events carry the potential to drive unpredictable changes in year-ahead rebalancing flows across currency markets, and hedging demand is pushing up one-week implied volatility levels in most majors.

The Canadian dollar is back near levels that prevailed ahead of yesterday’s rate decision. The Bank of Canada raised rates by more than expected – half a percentage point – but offset the impact on yields and the exchange rate by signalling an imminent pause in its tightening cycle. In what seems to have become a tradition in Canadian central bank communications, deputy governor Sharon Kozicki will further elucidate the reasoning behind the decision in comments later today, potentially triggering corrective moves on foreign exchange markets.

Oil prices are trying to reverse a sustained period of losses, with both the West Texas Intermediate and Brent benchmarks up more than a percentage point overnight as hopes for a rebound in Chinese demand add support. Crude prices are now below levels that prevailed ahead of Russia’s attack on Ukraine, suggesting that an energy-driven jump in year-over-year inflation rates could turn distinctly negative in the early new year.

Japan’s current account balance unexpectedly fell into the red in October, putting renewed pressure on the yen. Stronger auto and electronics exports were offset by rising costs for coal, natural gas, and oil in the month, defying expectations for a bigger improvement in the country’s terms of trade. The yen is arguably the most undervalued major currency, trading well below levels implied under purchasing power parity estimates or models like behavioural equilibrium exchange rates – but it’s not clear what might trigger a return to fundamental valuations.

The number of Americans filing initial claims for jobless claims is seen ticking slightly higher to 230,000 in the week ended December 3, up from 225,000 in the week prior.

No other major releases are scheduled. One might think this should reduce volatility, but idle traders are the devil’s playthings – flimsy, narrative-driven price action could dominate through the session.

Karl Schamotta, Chief Market Strategist