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Volatility falls into holiday-shortened week

Goldilocks is eating everybody’s porridge this morning, ignoring her mama’s warnings about ruining her appetite for Thanksgiving. With markets increasingly convinced the US economy is headed into a period of not-too-warm, not-too-cold growth, the dollar is trading at its lowest levels in more than two months, Treasury yields are holding steady, and equity futures are edging higher ahead of the open. Implied volatility measures continue to trend lower across asset classes.

Currency markets are exhibiting typical “dollar smile” dynamics as a narrowing in expected growth rates and a drop in US rate projections helps spark a recovery in outbound capital flows. Absent an unexpected shock, emerging market and high-beta currencies like the Canadian and Australian dollars look likely to outperform through to the next big event risks on the economic calendar: the December 3 non-farm payrolls report and the December 12 inflation print.

The greenback could end the year on a substantially weaker footing if incoming data remains consistent with the “soft landing” thesis. But if the economy’s descent accelerates as it approach the runway, trading behaviour could easily flip so that its safe haven characteristics are in demand once again.

The euro is inching upward after a key European Central Bank policymaker warned markets might have gone too far in anticipating an imminent pivot to easing. Potentially foreshadowing similar language from Fed officials, Governing Council member Pierre Wunsch said “Is it a problem if everybody believes we’re going to cut? Then we have a less restrictive monetary policy. And I’m not sure that then it’s going to be restrictive enough. So it increases the risk that you have to correct in the other direction”. The exchange rate is nearing the critical 1.10 threshold that could act as a new floor in the event of a reset higher.

Japan’s yen is also pushing higher on an improvement in rate differentials relative to the dollar. We’d generally expect a short squeeze at this juncture, but positioning still looks fairly modest, and the gap between Japanese yields and their American equivalents remains extremely wide. We think the currency could execute a gradual grind higher in coming months, with bigger upside gains only coming in the event of a global market selloff.

Markets are otherwise quiet, except in Argentina. After campaigning on promises to dollarize the Argentinian economy and scrap the central bank, Javier Milei won yesterday’s presidential election, raising questions around how he will implement his plans. The country’s dollar reserves and saleable assets are still far smaller than overall money supply, meaning that dollarization can likely only occur in combination with a further tumble in the already incredibly-weak peso. We will be watching closely as the experiment unfolds.

TUESDAY

Canadian all-items inflation likely continued its deceleration in October, with consensus estimates suggesting prices rose 3.1 percent year over year, down from 3.8 percent in September as global energy prices fell. An average of the Bank of Canada’s two preferred measures – median and trim – might have pushed slightly higher to 3.2 percent, but with soaring mortgage costs doing much of the heavy lifting, markets and policymakers should remain convinced of a prolonged hold from the central bank. (08:30 EDT)

A record of the Federal Reserve’s early-November decision should bear the imprint of a more cautious approach from policymakers, helping provide context for Chair Powell’s mildly dovish performance during the post-meeting press conference. We think officials likely emphasized signs of slowing momentum in the economy, worried that a blockbuster third-quarter jump in gross domestic product wouldn’t be repeated, and discussed the role markets were playing in tightening overall financial conditions before concluding (in carefully-hedged language) that a final rate hike could prove unnecessary. (14:00 EDT)

The Canadian government’s fall economic update will lean heavily on initiatives to boost housing supply, but a substantial increase in deficit projections could steal most of the thunder. With slowing growth nibbling at revenues while rising interest rates and prior spending promises eat purchasing power, observers are braced for a $5-to-10 billion dollar increase relative to last year’s estimates. This isn’t likely to move the exchange rate or make Canada a pariah on bond markets – interest expenses will remain small as a share of gross domestic product, and the country’s public finances are in good shape relative to its peers – but more restrained spending could act as a drag on the economy in the year to come. (16:00 EDT)

WEDNESDAY

With orders for Boeing aircraft halving from September levels, markets think durable goods orders fell at least 3 percent last month – but a slightly more attractive picture should emerge below the headline level. Consensus suggests orders with transportation excluded rose 0.2 percent in October after climbing 0.4 percent in the prior month as businesses slowed spending on plant and equipment. (08:30 EDT)

Initial jobless claims likely jumped again last week as seasonal adjustment factors played their typical role, but the four-week moving average should also show signs of emerging weakness in the labour market. (08:30 EDT)

THURSDAY

US markets are closed in observance of the Thanksgiving holiday.

FRIDAY

Canadian retail sales probably flatlined in September – as per Statistics Canada’s advance estimate – before falling into negative territory in October. After a remarkably long delay, households are likely beginning to turn more cautious as they are squeezed by slowing wage gains, ebbing excess savings, weakening wealth effects, and a drastic rise in borrowing costs. We expect more of the same in the coming months (excepting the typical holiday-related bacchanalia) and think dropping consumption levels will drag overall growth levels down in the new year. (08:30 EDT)

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