CAD
A BoC policy decision was the second of two major events yesterday, seeing the Governing Council ease by 50bps to take the policy rate to 3.25%. Admittedly this was a larger move than our pre-announcement call. But the overall messaging was very much in line with our expectations, which had looked for a hawkish shift in tone. USDCAD slipped, as we had anticipated while loonie upside should remain supported into year-end too, with government support for households set to boost economic readings in Q4. But, the start of 2025 is likely to kill off any lingering holiday cheer. Trump tariffs will weigh heavily on the Canadian economy, leading us to call for further policy easing and widening US-Canada rate differentials next year.
USD
Yesterday’s US CPI release met expectations, with core inflation growing by 0.3% MoM and 3.3% YoY. With headline inflation nudging up as well, combined with resilient supercore readings, Wednesday’s CPI data had all the hallmarks of inflationary stickiness that should trouble the Fed. Yet despite this, swap markets accelerated FOMC rate cut bets. As of this morning, OIS pricing implies a 98% chance that the Fed cuts rates next week, up from 85% pre-release. To us, this looks bizarre given the resilience on show in yesterday’s readings. Nevertheless, we doubt the FOMC would be willing to hold rates with markets so heavily favouring a cut, for fear of triggering market panic. As such, we have updated our call for Fed easing, expecting a cut next week, followed by a prolonged hold in 2025 considering stalling disinflation progress. If we are right, then this should leave our core thesis for the dollar intact, with Fed hawkishness still set to prompt dollar upside next year.
EUR
The ECB should be the main focus for markets this afternoon. While there is little doubt that the Governing Council will trim rates by 25bps, there will be significant interest in Lagarde’s press conference, and on eurosystem staff forecasts. The big question in our eyes regards to what extent policymakers are willing to price in headwinds stemming from events in the US that are on the horizon. If we were to guess, the answer is likely to be not by much, which if realised, should keep the EURUSD reaction muted post-decision. But where there are risks this afternoon, we see them as skewed in favour of more dovishness than expected, leaving the likely euro reaction asymmetrically biased to the downside today.
SNB
The SNB delivered its Q4 rate decision at 8:30 GMT this morning. We were off consensus ahead of the announcement, expecting a 50bp rate cut despite the overwhelming sell-side consensus favouring a smaller 25bp move. Given the current strength of the franc, outright deflation is a significant concern warranting aggressive policy easing, at least in our view. But the SNB appears to agree with us, cutting by 50bps as expected and sending EURCHF half a percent higher immediately post-announcement.
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