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Pivot hopes carry markets higher

Markets are blithely ignoring Friday’s hawkish guidance from Jerome Powell. Risk-sensitive assets and high-beta currencies remain well-bid even after the Federal Reserve chair said it was “premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” with investors instead choosing to focus on a brief aside in which he acknowledged rates had been lifted “well into restrictive territory,” allowing policymakers to “proceed carefully”. Yields and the dollar are down and overnight index swaps are showing more than 125 basis points of easing priced in to the curve for 2024, with the first cut expected in March.

Major oil benchmarks are trading on a slightly firmer footing amid rising geopolitical tensions in the Middle East—Iran-backed Houthi rebels based in Yemen have stepped up attacks on US warships and oil tankers in the Red Sea—but remain lower relative to levels set a few weeks ago. The scale of last week’s OPEC+ production cuts largely failed to alter increasingly bearish views on underlying demand and supply dynamics, and traders doubt cartel members will deliver full compliance.

The Canadian dollar is on the offensive, climbing against a weaker greenback as investors prepare for a decision from the country’s central bank on Wednesday. Policymakers, caught between a slowing economy and signs of a premature easing in financial conditions, are unlikely to sound the all-clear on inflation, but might shift the emphasis from lifting rates “higher” to holding them for “longer” in the accompanying statement. With market consensus aligned with softer guidance, a more hawkish outlook could help lend short-term support to the loonie.

The euro is failing to keep pace against the Japanese yen, British pound, and Swiss franc in outperforming the dollar on narrowing rate differentials. The common currency suffered a heavy blow last week when updated data showed inflation rates fading far more quickly than expected in November, joining clear evidence of slowing growth in putting the European Central Bank on course toward reducing rates at least as quickly as its American cousin in early 2024. From a technical standpoint, the euro-dollar pair’s path into the low 1.07’s looks relatively unobstructed.

The cadence of data releases remains slow, with the US set to drop its latest durable goods and factory orders numbers and Japan updating Tokyo inflation rates during today’s session. But the next major releases on the calendar—tomorrow’s US Institute for Supply Management services survey and Friday’s November non-farm payrolls report—could play a critical role in determining market direction through year end. Evidence of a slowing in economic activity could add fuel to existing trends, while upside shocks could push rate cut expectations further into 2024 and take dollar bears by surprise. We expect traders will want to tread more carefully as the week progresses – so we wouldn’t rule out a modest recovery in the greenback.

TUESDAY

October’s Job Openings and Labor Turnover Survey should show a continued decline in the number of vacant positions, with roughly a quarter million listings likely subtracted from the 9.55 million available in the prior month. The quits rate will likely fall more precipitously as a growing sense of caution persuades workers to stop seeking greener pastures. (10:00 EDT)

WEDNESDAY

The Bank of Canada is widely expected to stay on hold until the early new year, with excess demand evaporating, economic growth stagnating, and inflation pressures showing clear signs of subsiding toward target. Policymakers have little choice but to remain rhetorically hawkish for now – according to central bank orthodoxy, price risks could flare up again at any time – but markets are likely to ignore this, with most investors remaining convinced the first rate cuts will begin by April 2024. (10:00 EDT)

FRIDAY

Economists believe the United States generated another 200,000 jobs in November. Unemployment is seen holding steady at 3.9 percent, and average hourly earnings are expected to tick 0.3 percent higher on a month-over-month basis, up from 0.2 percent in October. Assuming that the data isn’t terribly distorted by the resolution of the United Auto Workers strike, risks are somewhat tilted to the downside – but the unemployment rate still looks unlikely to rise enough to trigger the “Sahm Rule” recession indicator. Instead, signs of softness will likely be welcomed in markets. (08:30 EDT)

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