Yesterday’s composite PMIs were generally stronger than expected across main developed markets, although there were clear signs of softening in manufacturing on both sides of the Atlantic. The currency market isn’t drawing many conclusions in monetary policy terms and dollar crosses seem to be settling in the latest ranges ahead of the last big week of macro events before the year-end recess.
In the US, we’ll see retail sales for November today, and expectations are for a robust read – which should, however, have little bearing on tomorrow’s FOMC communication, given some volatility and distortion still in the data due to the impact of extreme weather events. Market pricing is firm on a 25bp cut, which is also our call and consensus.
We think something of a wait-and-see approach could dominate today and favour a further consolidation in the dollar’s latest gains. Ultimately, unless the Federal Reserve signals a more dovish path than the market implies (and we don’t think it will), a 2-year USD OIS rate around 4.0% remains the key counter-seasonal factor keeping the dollar from correcting meaningfully in the generally soft month of December.
Elsewhere in North America, Canada has been shaken by the resignation of finance minister Chrystia Freeland due to divergences with PM Justin Trudeau on how to deal with the threat of Trump tariffs. Trudeau has nominated Dominic LeBlanc as a replacement. He was part of the Canadian delegation that visited Mar-a-Lago last month given his latest responsibility for border security.
Turmoil in Canadian politics is adding a reason the bearish side of the loonie, which remains heavily affected by the prospects of North America trade tensions. Should this lead to a collapse of Trudeau’s government and snap elections, expect the anti-tariffs policy to be the key theme of the campaign. Still, now that the news of Freeland’s resignation has been absorbed, we are not convinced USD/CAD needs to accelerate much further on the upside unless the Fed surprises markedly on the hawkish side. Both technical and seasonal factors point to the rally being stretched at this point – and we think it could stall after passing 1.430. That said, the outlook for next year remains gloomy for CAD, and chances of a shift to 1.45+ are tangible if Trump goes ahead with 25% tariffs on Canada.
Francesco Pesole
think.ing.com