At its November policy meeting, Fed Chair Jerome Powell signalled that while the pace of its rate hikes could moderate from here, its terminal rate could be higher than expected previously given how persistent US inflation has been. FX markets remain driven by the relative magnitude of central bank tightening, and this is supporting the USD which remains the G10 currency with the highest terminal rate. The USD is also a super liquid safe-haven that should continue to attract inflows from risk-averse investors that worry about the growth-negative impact of the continuing tightening of the US and global financial conditions. Next to the US inflation outlook, another reason for the persistent Fed hawkishness is the still-strong US labour market. In turn, any evidence in the near-term that the US labour market conditions remain tight could support the view that the Fed could continue to boost US rates, albeit at a slower pace in the coming months. Looking ahead to this week, focus will be on US CPI, consumer confidence and labor market data as well as Fed speakers. Evidence that inflation remains uncomfortably high, coupled with hawkish Fedspeak, should support the USD’s rate and yield advantage across the board. Elsewhere, the US mid-term elections are expected to lead to Congressional gridlock. The surprise would be if the Democrats managed to keep the House and Senate, which would raise the risk of more government spending.
Canadian Dollar Weekly
USD/CAD has bounced back off the bottom of its 1.35/1.40 range after the Fed left the terminal rate question open and fully dependent on upcoming developments. This somewhat contrasts with the already slowed pace of the BoC tightening, which has in turn translated into the widest rate spreads between the US and Canada since 2019. We nonetheless doubt such a move is to have much longer legs, as the Canadian economy has so far held up relatively well as it continues to benefit from the positive terms of trade. The first GDP estimates for Q322 were in line with the BoC’s central scenario and October’s payroll report came in much stronger than expected. USD/CAD is likely to take direction from broader market themes in the week ahead.
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