Market Brief: Dollar Softens, Canadian Growth Remains Lacklustre

Amid turbulent month-end flows and a serious tryptophan hangover, the dollar is retreating and volatility expectations are falling as investors bet that Donald Trump’s trade bite won’t match his bark. The greenback looks headed toward its biggest weekly loss in three months after several relatively-moderate cabinet picks - most notably Scott Bessent as Treasury Secretary - helped assuage market fears of a more extremist policy mix in the president’s second term, lowering long-term yields and reducing the risk discount embedded in other major currencies. Equity futures are pointing toward further gains in today’s holiday-shortened session, the ten-year Treasury yield is down to 4.21 percent after topping 4.5 percent earlier in the month, and most major currencies are advancing against a beleaguered greenback.

The Canadian dollar, in contrast, is back on the defensive after the economy expanded less than forecast in the third quarter and showed signs of a weak handoff into the fourth - helping raise market bets on a jumbo-sized rate cut at the Bank of Canada’s December meeting. Numbers released by Statistics Canada this morning show real gross domestic product growing at a 1-percent annualised pace in the three months ended September - below market expectations and the Bank of Canada’s 1.5-percent estimate - and a preliminary estimate showed real gross domestic product growing just 0.1 percent in October.

Business investment turned deeply negative as the non-residential investment category partially unwound the previous quarter’s gain - and with Donald Trump issuing trade threats on a regular basis, prospects for a near-term recovery look fairly dim. Rising uncertainty could lead policymakers to take out insurance against further weakness.

But we don’t think there is a clear case for another 50 basis-point cut at the central bank’s next meeting. Personal income growth remained strong and household consumption jumped 3.5 percent in the third quarter, and final domestic demand - often a cleaner read on underlying conditions - rose 2.4 percent. This suggests that the central bank’s easing efforts are bearing fruit in helping reverse a long period of softness driven by sharp increases in borrowing costs, and - when taken in combination with a recent acceleration in underlying inflation, a recovery in housing market activity, and evidence of rising retail spending - should bolster odds on a more gradual course of rate cuts ahead.

Inflation accelerated in the euro area last month, but not by enough to shift the European Central Bank’s easing trajectory. According to Eurostat, headline consumer prices climbed 2.3 percent in the year to November, up from 2.0 percent in the prior month, but this was largely driven by a rise in fuel prices relative to last year. Core inflation held steady at 2.7 percent, while service cost increases remained elevated, rising 3.9 percent year over year, down from 4.0 percent previously.

The euro is trading lower nonetheless, suggesting that yesterday’s speech from the typically-centrist French governor Villeroy de Galhau is translating into a dovish appraisal of the central bank’s policy path. Villeroy noted that current rate settings should be considered very restrictive, opening up “significant room” for easing, and said he “wouldn’t exclude” a move down to a neutral rate in the 2-to-2.5-percent range if weak growth translates into a rapid decline in inflation. This came after his significantly more hawkish - and not coincidentally German - counterpart Isabel Schnabel told Bloomberg rates were already near neutral, saying “I would warn against moving too far, that is, into accommodative territory”. Markets are priced for six cuts by the end of 2025, up from 5.75 at the beginning of the week.

French government borrowing costs have climbed above their Greek equivalents for the first time in modern history, generating alarming headlines about a return to the 2012 euro crisis - when our favourite* dad joke went something like: “Question: What is the capital of Greece? Answer: About 1 euro”. Markets are growing increasingly concerned about France’s political and fiscal outlook as a minority government struggles to bring deficits under control, and the country has become one of the euro area’s riskiest borrowers, with yield spreads against German bonds regularly widening out to 12-year highs in recent weeks. But the parallels are largely superficial - in absolute terms, yields have fallen this week, and remain far below levels that would be indicative of an incipient debt crisis.

Back on the US side of the pond, Wednesday’s personal consumption expenditures report delivered no surprises, showing inflation picking up a little speed. As had been expected, the headline price basket climbed 2.8 percent in the year to October, up from 2.7 percent in September, while the core measure rose 2.8 percent from 2.7 percent prior. A number of shorter-term measures of underlying price pressures subsided, and so-called “supply-driven” inflation showed only modest signs of firming, pointing to a modest tailwind from corporate front-running of the Trump administration's impending tariffs.

Barring a spectacular bounceback in next week’s non-farm payrolls number, we think the Fed will deliver a quarter point cut in December, followed by a pause at the January meeting - but the statement of economic projections - colloquially known as the “dot plot” - could deliver more drama than the decision itself. Officials are likely to shy away from directly forecasting the impact of fiscal and trade policies under Donald Trump, but could nonetheless increase estimates of the long-term “neutral rate” at which the Fed Funds rate is expected to settle.

*Second favourite:

Almost tripped over a Grecian Urn the other day.

What's a Grecian Urn?

Not much.

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