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CAD

07 Dec 2023

Yen soars on rate hike prospects  

Japan’s yen is on a tear as markets go all-in on bets the central bank is poised to lift rates out of negative territory. The currency leapt more than 1.8 percent last night when Bank of Japan Governor Ueda told Parliament monetary policy decisions could “become even more challenging from year end and heading into next year,” adding fuel to speculation that began a day earlier when Deputy Governor Himini argued that positive interest rates could prove economically-beneficial. We consider Himini’s comments extremely meaningful—they mark a significant change in Bank orthodoxy and should be read as preparing the ground for...

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06 Dec 2023

Bank of Canada holds, turns cautious

As had been widely anticipated, the Bank of Canada held its benchmark overnight rate at 5 percent this morning, but language in the accompanying statement tilted in a modestly-dovish direction, helping ratify market expectations for rate cuts in early 2024.  Officials acknowledged signs of weakness in the economy, saying “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year”. Government spending and new home construction were highlighted as helping cushion downside risks, but labour markets were seen softening, with...

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06 Dec 2023

Pivot expectations go global

The greenback is staging a modest recovery this morning – not because traders are suddenly coming to the realization that Federal Reserve rate cut expectations have overshot, but because expectations for other central banks are falling even faster. Investors expect six rate cuts from the European Central Bank next year after German factory orders fell unexpectedly in October, adding to a mountain of evidence suggesting that the powerhouse of the euro area economy is in recession. Demand for manufactured goods fell -3.7 percent, coming in well below the 0.2-percent increase expected by economists as machinery and equipment orders plunged. In...

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05 Dec 2023

Cognitive dissonance in markets begins to correct

Risk-sensitive currencies are giving back some of last week’s gains this morning, tumbling in the face of a resurgent dollar. US Treasury yields are climbing and the greenback is pushing higher as investors begin to question whether the Federal Reserve will cut rates aggressively without a “hard landing” in the economy next year. With unemployment inching up, consumer spending showing clear signs of exhaustion, and business capital expenditures shifting into reverse, the typical indicators of a recession are blinking red, and data out this week—today’s Institute for Supply Management services survey, and Friday’s November non-farm payrolls report—could provide more evidence...

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04 Dec 2023

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,...

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