CAD
The loonie continues to test new lows this morning following news that Finance Minister Chrystia Freeland is set to resign. The announcement leaves Justin Trudeau’s government on the brink of collapse, with markets fretting over the prospect of new elections early in the new year. That said, while political uncertainty is propping up USDCAD for the time being, we are inclined to see the prospect of a new government in Canada as loonie-positive in the medium term. The Conservatives are ahead in the polls, and are likely to pursue a more market-friendly approach than the current liberal administration. Even so, for this outcome to be realised, an election needs to be called. Until that happens, CAD is likely to continue trading under pressure as markets discount the current political dysfunction in loonie valuations.
USD
While tomorrow’s FOMC meeting is the big US event of the week, today, retail sales data should offer an appetiser for FX markets. Traders expect a solid pickup in consumer demand in November, looking for a 0.4% MoM core sales print, which should see the dollar trade on the front foot this afternoon if realised. Even so, we would not be surprised if market reaction is muted, with traders inclined to stay non-committal ahead of the Fed’s latest policy announcement. Despite a rate cut being unanimously expected by sell-side economists, uncertainty around the Fed’s easing path means this meeting will be closely watched. We are looking for a significant hawkish revision to the Fed’s SEPs, which if delivered, should keep the dollar trading on the front foot into year-end.
EUR
While yesterday’s PMIs offered a mixed bag of indicators for the eurozone, traders were ultimately happy to take relief from the fact that they could have been even worse. Granted, political risks appear to be weighing heavily in France, but an uptick across the German readings is a welcome sign, as is the improvement in the composite print for the bloc, which rose from 48.3 to 49.5. This was sufficient to see the euro make marginal headway on Monday, rising 0.15pp versus the dollar. Even so, the single currency has not held onto these gains, and is already trading under pressure this morning. In focus for today, IFO and ZEW sentiment readings should be front of mind for traders – we are inclined to think that political dysfunction should continue to weigh heavily, implying a set of disappointing prints, and an extension of the current euro sell-off.
GBP
Sterling has been on a run to start the week, rising 0.35% against the euro and 0.5% against the dollar on Monday. While yesterday’s strength was underpinned by PMIs, this morning it is labour market data that has helped the pound to take another leg higher. Granted, the unemployment rate remained unchanged at 4.3%, but wage data appears to have caught market attention – excluding bonuses, weekly earnings rose by 5.2% 3m/YoY in October, up from 4.8% the month prior. This disrupts what had been a broad downward trend in pay expansion that has been playing out since mid-2023, and offers a counterpoint to recent growth indicators that have softened notably, raising the prospect of faster easing next year. We continue to project 100bp of easing in 2025, in line with Governor Bailey’s recent comments, albeit confirmation of this later in the week should see the pound give back some recent gains, given that markets now price just 61bps of easing through to November next year following this latest data.
This content was originally published by our partners at Monex Canada.