Currency markets are becalmed, with bond yields and interest differentials trading within remarkably-tight ranges as central bank policy trajectories become – seemingly – more predictable. Yields in the major economies moved less than two basis points over the course of yesterday’s session, marking a big departure from the dramatic moves seen earlier in the year.
The euro is almost-imperceptibly higher after Eurostat said the economy expanded slightly more than previously estimated in the third quarter.Gross domestic product grew 0.3 percent between July and September, beating the 0.2 percent initial estimate as fixed capital investment and household consumption helped offset an Ukraine war-related terms of trade shock. Few expect growth to remain positive in the final quarter of the year however – higher energy prices and interest rates are likely to push the euro area into recession. Markets currently assume the European Central Bank will hike its benchmarks by half a percentage point next week, before following its global counterparts in slowing the pace of tightening.
China’s State Council announced a further rollback in “zero-covid” policies, telling local governments to allow individuals to quarantine at home and eliminate test screening in most public places. Xi Jinping and the politburo appear to be responding to signs of public dissatisfaction with draconian clampdowns, but the reversal also comes as global demand for the country’s exports begins to wane. Data released last night showed shipments to the rest of the world falling for a second month in November, down 8.7 percent year-on-year.
No major data releases are in today’s US docket.
The Bank of Canada will announce its latest decision at 10:00 am. With domestic demand crumpling and inflation rates showing signs of rolling over, we think policymakers will pair a 25 basis-point hike with a relatively hawkish statement, but consensus estimates collected by the two major data providers – Bloomberg and Reuters – suggest that a 50 basis-point move is more likely.
Directional position-taking in the Canadian dollar has been relatively limited lately, but weakening interest differentials – and a spectacularly-inverted yield curve – have pushed the currency to the bottom of its trading range, meaning that a larger hike could provide an outsized upside jolt.
Karl Schamotta, Chief Market Strategist