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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 a policy change—but underlying growth and inflation data do not yet support a move, so investors could be stuck waiting many months for a move.

Oil traders are licking their wounds after brutal selling sent both global benchmarks tumbling lower in yesterday’s session. Brent has lost almost 10 percent of its value this month and barrels of West Texas Intermediate are 8 percent cheaper, down almost a quarter from September’s peak as burgeoning non-OPEC supply levels interact with an increasingly-depressed global demand outlook. According to estimates from the Energy Information Administration, the US alone will add at least 850,000 barrels a day in output this year, almost single-handedly offsetting the cartel’s production cuts.

The Canadian dollar is back on the defensive, losing ground against the greenback amid a broader deterioration in risk sentiment. Yesterday’s Bank of Canada decision—which leaned dovish, yet retained the now-obligatory rate-increase threats—left markets essentially unmoved, with rate differentials remaining stable. This afternoon’s speech from Deputy Governor Toni Gravelle at the Windsor-Essex Regional Chamber of Commerce could have deeper implications, helping shed light on the thinking behind a statement that—to us, at least—helped set the stage for rate cuts in the early new year.

It’s too early to draw firm conclusions, but currency markets may have shown signs of undergoing a phase shift over the last day, with the dollar ignoring falling yields to climb against its major rivals. Under the “dollar smile“ doctrine that has described foreign exchange market dynamics in recent decades, the greenback tends to outperform in two diametrically-opposed environments: when the US economy is strong and the Federal Reserve is tightening policy, or when the rest of the world is undergoing a violent slowdown and the US is acting as safe haven. The former condition held true up to mid-October, markets then spent most of November at the bottom of the smile, and worsening global fundamentals may already be pushing us up the other side. If this is the case, the dollar could prove more robust than speculators currently believe.

Today’s data calendar is sparse, with weekly jobless claims expected to hold relatively steady. Tomorrow’s non-farm payrolls report, next week’s US consumer price update, and European Central Bank meeting all loom as possible volatility catalysts, but we’re tightly focused on Wednesday’s Fed decision as a potential market-rocker. If the “dot plot” summary of economic projections fails to show a meaningful drop in expected policy rates for 2024, investors could suffer a rude awakening, and a flurry of year-end rebalancing trades might unfold across the financial system. Which is to say: stay frosty out there – 2023 ain’t over till Powell sings again.

Still Ahead


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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