Market Brief: Dollar recovery extends

The dollar is steamrolling over its major counterparts again this morning as investors unwind exposures in other jurisdictions and pile into bets on continued gains in American equity markets. The trade-weighted greenback is up around a quarter-percent from yesterday’s North American close, Treasury yields are slipping across the front end of the curve, and stock market futures are pointing to another advance at the open.

Japan’s yen is still tumbling, helping support global liquidity conditions. Shinzo Abe disciple Sanae Takaichi’s win in the weekend’s Liberal Democratic Party leadership election has unleashed a surge in speculative pressure against the currency, pushing it through a number of key resistance levels over the last two trading sessions. With the 155 threshold coming into view, there’s little to suggest that our expected reversal is in the offing, but it is important to note that the speed and scale of the drop is likely setting off alarm bells at the Bank of Japan, which has proven more than willing to intervene when “disorderly” exchange rate moves have occurred in the past.

Realised volatility has not yet climbed to extreme levels, but we would nonetheless caution against holding risk between 4:00 and 7:00 pm Eastern time. During this period, thin liquidity often invites official intervention and leaves markets vulnerable to abrupt moves driven by speculation or unfounded rumours. It is also worth noting that, while the yen may appear peripheral to North American foreign exchange activity, sharp fluctuations in the currency have historically disrupted the US dollar, Canadian dollar, and Mexican peso, as the unwinding of carry trades has amplified broader shifts in risk sentiment.

The euro is enjoying a modicum of stability after French Prime Minister Sebastien Lecornu noted that the prospects for a budget deal getting through the country’s incredibly-fractious parliament had brightened, making another snap election less likely. Lecornu, who had been given 48 hours to negotiate a deal with his political adversaries after tendering his resignation to President Macron on the weekend, said “There is a willingness to have a budget for France before December 31 of this year, and this willingness creates momentum and convergence, obviously, which reduces the prospects of dissolution”. Franco-German bond spreads are edging down, but remain elevated as investors brace for an eventual downgrade in France’s credit rating.

This afternoon’s Federal Reserve minutes may pose a threat. Although the September gathering concluded with a relatively dovish “dot plot” projecting two additional rate cuts this year, subsequent remarks from policymakers have made clear that most remain alert to inflationary pressures—and that recent Trump appointee Stephen Miran continues to occupy a lonely, dovish corner of the debate. The minutes are expected to reveal broad agreement with Chair Powell’s assessment that risks have shifted toward a softer labour market, yet they will likely also show that “most” participants favoured a more measured approach to further easing, given that, at the time of the meeting, several economic indicators were improving and inflation expectations were edging higher once again.

The New York Fed’s monthly Survey of Consumer Expectations yesterday showed Americans turning increasingly pessimistic about their financial futures. The estimated likelihood that the jobless rate will be higher a year from now climbed 2 percent in September to 41.1 percent, annualised earning growth forecasts dropped 0.1 percent to 2.4 percent, and the perceived probability of losing one’s job in the next twelve months rose 0.4 percent to 14.9 percent. Year-ahead inflation expectations pushed higher to 3.4 percent from 3.2 percent, and five-year-forward expectations inched up to 3.0 percent from 2.9 percent.

Yesterday’s meeting between Donald Trump and Canadian Prime Minister Mark Carney avoided descending into acrimony, averting damage to the Canadian dollar. There was little progress on trade issues, with sector-specific tariffs on automobiles, steel, aluminum, and softwood lumber remaining in place. In reference to the USMCA trade pact, Trump said, “We could renegotiate it, and that would be good, or we can just do different deals. We’re allowed to do different deals if we want. We might make deals that are better for the individual countries”. Yet, the White House working lunch concluded on an unexpectedly-cordial note, with Trump calling Carney a “world-class leader” and a “tough negotiator,” adding, “I think the people of Canada, they will love us again” once tensions subside.

Tariffs have been inflicting pain on the Canadian economy. Data released yesterday revealed a worsening trade deficit in August, with merchandise imports climbing 0.9 percent while exports dropped 3 percent. Although the headline figure was distorted by another sharp swing in unwrought gold shipments—down 11.8 percent amid shifting arbitrage opportunities between New York, London, and Zurich—underlying weakness was broad-based. Motor vehicles and parts declined 3.9 percent month-over-month, lumber exports fell 25 percent, and copper plunged 27 percent. Overall, exports to the United States were down 8 percent from a year earlier, while shipments to non-U.S. destinations edged up 1.8 percent from a smaller base.

Taken together, these developments suggest that Friday’s labour force survey will likely show trade-sensitive industries shedding jobs in September, with surprisingly-steady domestic demand only partly cushioning the drag on growth. We think the balance of risks points to the Bank of Canada delivering another rate cut at its late-October meeting, even as inflation runs slightly above target and the federal government looks set to unleash a major investment push in its November budget. With markets currently pricing a roughly-60-percent chance of such a move, there remains scope for interest rate differentials to move further against the loonie in the coming weeks, limiting its upside potential.

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