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Trading Ranges Narrow Ahead of US Inflation Print

Currency markets remain fundamentally directionless this morning as traders batten the hatches ahead of tomorrow’s US inflation report. The DXY dollar index is modestly softer, dragged lower by an incremental decline in Treasury yields, and equity futures are setting up for another day of sideways movement.

Oil prices are lending the Canadian dollar some support, with both major benchmarks rising as tensions in the Middle East ratchet higher. Houthi rebels based in Yemen fired eighteen drones, two cruise missiles and a ballistic missile at shipping in the Red Sea during European trading hours, adding to the likelihood of an assault by allied forces on land-based targets in the weeks ahead. Rate cut expectations in both Canada and the US have pulled back relative to late-December levels in the last week, leaving dollar-favourable interest differentials relatively intact, and keeping the exchange rate well-supported in its post-October trading range.

Overnight index swap-implied change in policy rate, basis points

Japan’s yen is slightly lower after data released last night showed headline wage growth slowing dramatically in November, undershooting market estimates by a wide margin. Nominal cash earnings for Japanese workers rose just 0.2 percent from the prior year, down sharply from the 1.5 percent increase in October, with real wages plummeting more than 3 percent. Growth in core pay – more closely watched by policymakers – climbed 1.9 percent year-over-year, down from 2 percent in the prior month. To put it mildly, we’re not seeing signs of a consumer demand-driven recovery that could pull the country out of the economic mire. Against this backdrop, the impetus for a normalization in policy at the Bank of Japan looks fairly weak – unless you think, as we do, that negative rates are compounding the economy’s underperformance.

The euro is holding its ground as investors process a relatively well-balanced outlook from European Central Bank Vice President Luis de Guindos. In a speech, de Guindos said “Soft indicators point to an economic contraction in December, confirming the possibility of a technical recession in the second half of 2023,” noting that “Incoming data indicate that the future remains uncertain and the prospects are tilted to the downside,” while warning “The rapid pace of disinflation that we observed in 2023 is likely to slow down in 2024, and to pause temporarily at the beginning of the year, as was the case in December”.

Bitcoin prices are back down after briefly jumping to a 21-month high yesterday when a hacker, surely bent on manipulating markets, issued a fake press release from the SEC’s Twitter account approving plans to offer crypto-backed exchange traded funds. Such episodes are not unusual in the imaginary money space, but the prospect of something similar occurring in actual currency markets is real, and deeply worrisome.

There are no major data releases scheduled during today’s North American session, but this afternoon’s speech from the New York Fed’s John Williams could shake things up. Williams – who is considered one of the most influential members on the central bank’s policy committee – appeared determined to push back against overly-dovish pricing in markets in late December, and could deliver a similar message in today’s economic outlook. Data released in the interim has broadly pointed lower, but November’s premature easing in financial conditions could yet ignite a resurgence in consumer demand, derailing the rate cut projections currently embedded across markets.


Markets are braced for a modest re-acceleration in US headline inflation in December’s data, with the month-over-month increase in prices moving up to 0.2 percent from 0.1 percent in November. Higher gasoline costs are seen pushing annual price growth to 3.2 percent from 3.1 percent prior, but the core basket should slow to 3.8 percent from 4 percent prior. An above-consensus print could force markets into lowering the number of rate cuts expected over the next year, while a weaker number might drive a doubling-down on the “soft landing” thesis that lifted global asset prices in November and December. (08:30 EDT)


The British economy is seen bouncing back from October’s -0.3 percent contraction in November, but a modest 0.2 percent gain is unlikely to fully offset recessionary risks. Signs of improvement are appearing – consumer confidence and retail sales have risen in recent months, and purchasing manager surveys are pointing to a stabilisation in business investment – but output may have shrunk another -0.1 percent in the fourth quarter of 2023, and could remain in contractionary territory for months yet. If inflation follows current consensus in falling precipitously, the Bank of England is likely to begin a rhetorical pivot imminently. (02:00 EDT)

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