The dollar is slipping and risk sensitive exchange rates are recovering this morning as risk appetite improves after yesterday’s hawkish comments from Fed officials. Mr. Bullard, notoriously hawkish, but not a voting member of the Federal Open Market Committee next year, said rates might have to climb above 5.25 percent as previous increases have “had only limited effects on observed inflation”. Neel Kashkari – once one of the most dovish Fed policymakers – walked a similar path later in the day, saying “we cannot be overly persuaded by one month’s data”, helping to push back against the wholesale loosening in financial conditions that has helped dull the dollar’s edge since September.

Oil prices are continuing their descent, with both global benchmarks sliding further into the red in overnight trading. Brent has dropped 7.8 percent and West Texas Intermediate is down 9.4 percent on the week, with many pinning blame on a deteriorating global demand outlook as growth slows and China maintains strict lockdown policies. Other data look contradictory – inventories are plumbing extreme lows, consumption levels are holding steady, and production is growing more slowly than had been expected. As has been the case so many times in recent years, we suspect shifts in speculative flows are playing a bigger role in driving price action than any single fundamental factor.

Canada’s loonie is holding up relatively well, continuing to exhibit higher correlations with the S&P 500 index than with traditional drivers like oil prices or interest differentials. Yesterday’s price action provided a clear example of this – the exchange rate slumped with US equities in the morning after Bullard’s comments, but then rebounded through the day as key technology and retail names beat earnings estimates. To some extent, this looks like a “financial conditions” trade – high debt levels have made the Canadian dollar outlook more dependent on lending conditions in US markets than on other factors that influence cross-border capital flows.

The euro is little changed after European Central Bank President Christine Lagarde threatened to keep raising rates into a downturn. In a speech given in Frankfurt, she warned that an economic contraction had become more likely, and said “Historical experience suggests that a recession is unlikely to bring down inflation significantly, at least in the short run”. Markets are positioned for a half percentage-point move at the central bank’s December meeting, with more tightening expected in the early new year.

Japan’s yen briefly strengthened last night as inflation hit a 40-year high, seemingly raising the odds on a pivot in central bank policy next year. Consumer prices excluding fresh food climbed 3.6 percent in October from a year ago, marking the fastest increase since 1982. But with energy costs excluded – bringing Japan into line with the “core” measure used in most industrialized countries – prices rose just 2.5 percent year-over-year, suggesting that underlying pressures remain remarkably subdued. Governor Haruhiko Kuroda has repeatedly pointed to depressed wage growth as a factor in keeping the central bank’s loose money policies in place, and he recently told parliament “I believe price growth will fall below 2 percent next fiscal year onward,” – but some are betting that a shift in direction could take place when his term expires in April. We wouldn’t bet on it.

A quiet Friday for economic data beckons: The Boston Fed’s Susan Collins is scheduled to deliver opening remarks at a conference on labour markets shortly. Markets are unlikely to react. Economists think US existing home sales probably fell to an annualized 4.37 million in October from 4.71 million a month earlier. And the Conference Board’s economic index is seen falling 0.4 percent in October.

Karl Schamotta, Chief Market Strategist