Market Brief: 'Perfect storm' boosts currencies and risk assets

A confluence of positive catalysts is lifting risk-sensitive currencies and asset prices this morning. The Federal Reserve is widely expected to deliver a quarter-point rate cut and bring its quantitative-tightening programme to an end this afternoon. According to the Wall Street Journal, President Trump is weighing a reduction in tariffs on Chinese imports, and market sentiment has been further buoyed by gains in the world’s most valuable company after Trump said he would discuss Nvidia’s Blackwell artificial-intelligence chips with Xi Jinping at their meeting tomorrow. Equity futures are climbing ahead of the open, ten-year Treasury yields are anchored below the 4-percent mark, and implied volatility across rates and currency markets is sinking toward cycle lows.

In theory, today’s Fed decision shouldn’t cause much turbulence. Markets are overwhelmingly positioned for a quarter-point rate cut, and a quarter-point cut will almost certainly be delivered. But investors also expect a dovish trifecta: additional committee members joining Trump-appointed Stephen Miran in dissenting in favour of a larger cut; Chair Powell signalling that another reduction remains on the table for December; and the central bank announcing a halt to quantitative tightening—a process that has shaved roughly $2.4 trillion off its balance sheet in the past three years. In practice, a repeat of September’s dynamic—signs of unity across the committee, a cautious tone from Powell, and a more nuanced approach to liquidity management—might generate a small dollar rally.

Here in Canada, we think policymakers will deliver a “hawkish cut” in this morning’s announcement. Recent data show the economy performing better than expected, with job creation and consumer spending holding up and underlying inflation running a bit hotter. The Carney government is poised to add further stimulus when it unveils its budget on November 4. Yet last week’s outburst from Donald Trump made it clear that the trade-policy uncertainty that has been suffocating business investment, hiring, and household spending is unlikely to fade anytime soon. In this context, a precautionary move that nudges rates toward the edge of accommodative territory seems prudent. Governor Macklem is likely to caution, however, that the bar to further easing is high, suggesting that policy is now well-positioned to respond to both upside and downside risks. If he pushes this point forcefully enough, the Canadian dollar could add to this week’s gains.

Currencies elsewhere are mostly marking time amid a lack of domestic catalysts. The Japanese yen is firming on comments from US Treasury Secretary Scott Bessent, who suggested that the government should give the central bank “policy space” needed to anchor inflation expectations and reduce exchange rate volatility. The euro is trading flat as markets brace for a snoozefest from the European Central Bank tomorrow. The pound is a lone exception among the majors, edging lower as fiscal concerns intensify ahead of the government’s budget on November 26. Investors think Chancellor Rachel Reeves will announce a raft of spending cuts and tax increases to fill a 20-billion pound hole in the country’s finances, implying slower growth in the year ahead.

Earnings reports from America’s technology giants will provide a focal point for investors over the next day and a half. With Alphabet, Amazon, Meta, and Microsoft all set to report third-quarter results, global market sentiment could hinge on what they say about a spectacular investment cycle that has seen the ‘Magnificent Seven’ valuations eclipse that of those of most global stock markets in the last three years.

Investment in the artificial-intelligence boom is leaving discernible fingerprints on currency markets. Capital is flowing toward countries perceived to sit at the frontier of chip design, data-centre build-out and model development—above all, the United States—providing structural support for the dollar as global investors chase equity gains and venture funding rounds. As capital expenditures on data centres and power infrastructure scale from billions into the hundreds of billions, exchange rates are becoming increasingly sensitive to where the “AI value chain” is located: countries that attract the fabs, the talent and the electrons are enjoying persistent currency inflows, while those left downstream in the hierarchy of hardware and regulation are finding themselves on the wrong end of the trade.

A reversal—if one comes—could hit the United States hardest. In the early stages of any correction, “dollar-smile” dynamics would likely assert themselves—US markets remain unrivalled as a safe haven, and the greenback should initially benefit. But that strength may prove fleeting. Foreign participation in American capital markets remains relatively limited, and the wealth effect from surging asset prices has been a crucial driver of domestic consumption. If the boom were to falter, a repeat of April’s abrupt dollar sell-off would be far from inconceivable.

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