The greenback is climbing and the risk-sensitive Canadian dollar is slipping ahead of a week that could prove pivotal in currency markets. Central banks in Australia, the US and the UK will deliver rate decisions and a slew of data releases including non-farm payrolls will be published in the coming days, helping to set market positioning into year end.

Traders are buying the Brazilian real after former president Lula da Silva triumphed over Jair Bolsonaro in a closely-fought election. The currency had traded with a persistent risk discount in recent months as Mr. Bolsonaro cast aspersions on the electoral process, but the vote appears to have concluded without major incident, and early signs suggest US-style unrest will be avoided if the incumbent concedes in the coming days. Major questions remain around who will be appointed to the cabinet, with former finance minister Meirelles considered the most market-friendly pick. We remain skeptical on Lula’s economic prescriptions, given that the conditions that prevailed in his first term – soaring commodity prices and a huge inflow of foreign investment propelled by the ‘BRICS’ meme – are unlikely to see a repeat.

The euro is up slightly after inflation hit record levels in October, solidifying bets on a narrowing in dollar-euro rate differentials. The European Union’s statistics agency said consumer prices climbed 10.7 percent in the year ending in October, with a 41.9-percent rise in energy costs providing the propellant for a broad-based increase. With highly-volatile categories excluded, the core measure rose 5 percent, up from 4.8 percent in September. Separate data showed the euro area economy avoiding recession in the third quarter, but signs of a slowdown were abundant and few expect growth to remain positive in the last three months of the year.

China’s economy underwent a sharp deceleration in October. According to last night’s release from the National Bureau of Statistics, the official manufacturing purchasing managers index fell to 49.2 in October – down from 50.1 in September. A broader non-manufacturing gauge, which includes construction and services sectors, tumbled from 50.6 to 48.7. Ongoing “covid-zero” lockdowns, a crackdown on high-flying technology firms, and efforts to reduce a vast debt overhang have pushed the country into a slowdown this year – imperilling Western forecasts for an imminent overtaking of the US economy.

Tomorrow’s Job Openings and Labor Turnover survey is likely to show another drop in US job vacancies relative to the number of unemployed people, underlining a gradual cooling in employment conditions.

The Federal Reserve will almost certainly hike rates by another 75 basis points on Wednesday, but markets will focus on what is said about the December meeting and beyond. Central bankers know they can’t continue to lift rates in 75-basis point increments without breaking something, but are also aware that any hint of a “pivot” in policy could trigger the sort of financial easing they are seeking to avoid. As such, we think Chair Powell will telegraph a slower pace of hikes while trying to guide terminal rate expectations toward the 5 percent mark – perhaps by hinting at a tightening cycle that stretches into the middle of next year.

Andrew Bailey & Co. are likely to deliver a 75-basis point hike at Thursday’s meeting, but longer term rate expectations are coming under sustained pressure. Deputy Governor Ben Broadbent recently suggested that markets had gotten ahead of themselves in pricing a terminal rate above 5 percent, and the government’s mid-November fiscal plan is expected to contain a number of austerity measures that could lower growth expectations. The pound is weaker, trading about a hundred points below the two-month peak reached last week.

Investors think the US generated another 200,000 jobs last month, down from 263,000 in the month prior, but still extremely strong for the later stages of an economic cycle. Friday’s non-farm payrolls report is also expected to show a slight rise in the unemployment rate to 3.6 percent and a deceleration in hourly earnings growth – data that should help justify a slowing in the Fed’s monetary tightening trajectory.

Karl Schamotta, Chief Market Strategist