Market Brief: ECB Cuts, US Price Pressures Rise, Dollar Holds Steady

Currency markets are seeing a modest mean-reversion move this morning, with the dollar holding firm against most of its major rivals. Ten-year Treasury yields are holding near the 4.28 percent mark on evidence of strengthening inflation pressures, equity futures are setting up for incremental losses at the open, and commodity prices are generally trading sideways as optimism surrounding China’s stimulus efforts fades.

The franc is trading near a two-week low - but is still near a two-decade high against the euro - after the Swiss National Bank delivered a larger-than-expected half percentage point rate cut in this morning’s decision. With inflation running at just 0.7 percent, growth remaining lacklustre, and the country’s export sector struggling with high currency valuations, new president Martin Schlegel said the central bank has plenty of “ammunition” left to counter exchange rate strength, warning “we remain willing to intervene in the foreign exchange market if necessary”.

The euro is back in negative territory, trading below the 1.05 threshold after the European Central Bank delivered a 25 basis-point cut—as had been almost universally expected—but changed its statement language materially, and lowered growth and inflation projections for this year and next. Language that previously committed to keeping rates “sufficiently restrictive” was abandoned, with officials now saying that they are determined to ensure that “inflation stabilises” at target. Policymakers now expect growth to hit 1.1 percent in 2025, down from 1.3 percent previously, and think headline inflation will subside to 2.1 percent, below the prior 2.2 percent.

In contrast, the Canadian dollar remains broadly unchanged after the Bank of Canada paired a 50 basis-point cut with a slightly more cautious message in yesterday’s announcement. A revision to the statement language noted that the Bank would determine whether to lower rates “one decision at a time” in the new year, suggesting that policymakers see the risk outlook turning more balanced in the coming months. Two- and ten-year yield spreads between US and Canadian instruments are holding steady as investors balance this with an ongoing war of words between US and Canadian politicians - on Monday, Donald Trump called Canadian Prime Minister the “Governor” of the “State” of Canada, and Ontario Premier Doug Ford yesterday promised to cut off electricity to the US if tariffs are implemented on the province’s exports.

US labour markets are showing signs of strain. The number of initial applications for jobless benefits submitted in the US jumped to 242,000 in the week ended December 7—above all economist forecasts—while continuing claims rose to 1.886 million in the prior week from 1.877 million previously.

And inflation pressures seem to be heating up. Producer price growth came in hotter than expected in November, with the year-over-year increase in headline prices hitting 3 percent - the fastest since February 2023. The core gauge climbed 3.4 percent, topping expectations for a 3.2-percent print. This comes after data released yesterday showed consumer price growth accelerating in November.

Odds on a rate cut at next week’s Federal Reserve meeting are holding at near-certain levels, and the monetary policy rate landscape going into year end is now fairly well understood. Although the Fed is seen cutting its benchmark by a quarter point, moves in the last 24 hours—from the Bank of Canada, Swiss National Bank, and European Central Bank—have ensured that cross-currency rate differentials will remain wide relative to the US, maintaining the dollar’s position in relative terms.

The policy landscape is not well understood. Although the base case for most investors and economists is aligned with a growth-positive business-as-usual approach from the incoming Trump administration, there are nonetheless major uncertainties surrounding the extent to which the president-elect’s trade threats will translate into reality. Traders are positioning for negatively-asymmetric outcomes in the Mexican peso, Canadian dollar, Chinese yuan, and euro, and accordingly seem likely to maintain a sell-first, ask-questions-later approach to any new policy announcements posted on Truth Social in the coming weeks and months.

The dollar may be seriously overbought at current levels, but the “risk discount” embedded in other currencies is unlikely to dissipate for now.

We would encourage hedgers to consider keeping automated market orders in place through the holiday season, given that thin liquidity conditions could exacerbate knee-jerk reactions—and create attractive trading opportunities—around the president-elect’s social media messages. Nathan Rothschild once said “The time to buy is when there's blood in the streets,” but the modern equivalent might be “The time to buy is when there’s Trump in the tweets”.

*Please note: Distribution of the Morning Market Brief will pause tomorrow and return on Monday.

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