Choppy Trade Into Month-End

WHERE WE STAND – A dose of déjà vu was delivered yesterday, as participants awoke to news of incoming President Trump’s plans to slap tariffs on a handful of nations – 25% on goods from Canada and Mexico, and an “additional” 10% on imports from China.

It would seem, however, that this is not a 2016 redux, at least not yet, and at least not from a market perspective.

While the CAD and the MXN both saw knee-jerk softness as the news broke, and the buck vaulted back north of the 107 figure, all of these moves were pared relatively rapidly as the day progressed. As the dust settled, and calmer heads prevailed, it became increasingly clear that these tariff threats are being seen primarily as a negotiating tactic – particularly with the USMCA trade deal to be re-opened in 2026. Furthermore, both economies have had some time to prepare for potential tariffs, and likely have some relatively easy – and, in the grand scheme of things, macroeconomically harmless – policy levers that can be pulled to keep Trump (relatively) happy in the meantime.

What was perhaps most interesting with the tariff news was that the market taking the hardest hit was that of Europe. When one considers those nations, or trade blocs, likely to be at the top of Trump’s ‘hit list’, there is one glaring omission from those slapped with trade taxes yesterday – the European Union.

Naturally, participants moved to price the potential for a similar announcement to be forthcoming towards Europe, with most bourses on the continent shedding around 1% on the day. Add this to the already-long ‘laundry list’ of bearish Europe catalysts including geopolitical tensions, structural domestic issues, and the continued lack of a Chinese economic recovery. There isn’t much good news out there, and the ECB show no sign of stepping up the pace of policy easing, though in all honesty a 50bp cut next month wouldn’t make much difference.

I question whether we are getting close to a point of ‘peak pessimism’ towards Europe, and the EUR in particular, though don’t think we’re quite there yet. Spot EUR/USD sank to 2-year lows at 1.0335 after the dismal PMI data at the back end of last week, and has since recovered back to the 1.05 handle. The bulls would ideally like to see a close back above 1.06, which stood as significant technical resistance earlier in the month, before becoming more convinced of further upside. Still, I stand by my call that we see EUR/USD print 1.10 before 1.00 (parity).

More broadly, participants are grappling with the need to price a much greater degree of two-sided risk as we move into 2025; whether this be in terms of growth, or inflation, as well as in the realms of fiscal, and monetary policy. This should lead to higher vol into the early part of next year, though thin conditions into, and after, Thanksgiving could make things something of a rocky ride in the short-term, particularly if any more ‘bolt from the blue’ headlines were to break.

Zooming in, the FX market was a messy chopfest yesterday, with month-end flows, along with a retracement of the tariff-linked USD strength from overnight, muddying the waters rather substantially. The CAD was, unsurprisingly, the biggest mover on the day in the G10 space, as USD/CAD slipped back from 4-year highs around the 1.42 figure, while the JPY found notable demand, as USD/JPY slipped to a 2-week low, testing 153 to the downside.

Elsewhere, Treasuries were also choppy, though ultimately ended the day softer, with weakness led by the belly of the curve, as a degree of Monday’s Bessent-based rally was unwound. Markets were safe in the belief that the ‘adults’ were back in charge for all of about 24 hours!

Meanwhile, crude went on a bit of a rollercoaster ride, with Brent briefly popping north of $74bbl intraday, before settling in the red to notch back-to-back daily declines for the first time in a couple of weeks. The brief upside came after reports that OPEC+ have begun talks on delaying January’s planned 180k bpd output increase, ahead of this Sunday’s meeting. A postponement already feels like the base case, and even with such a cut the dour demand outlook keeps risks to crude tilting to the downside – not withstanding geopolitical events, of course.

LOOK AHEAD – It’s, effectively, the end of the week! Yes, it’s only Wednesday; and, no, I haven’t gone mad. But, with the US observing Thanksgiving tomorrow, and most US-based participants out on Friday as well, the week essentially wraps up this afternoon.

Before getting to that, though, there is a packed data docket to work through – three days’ worth of data in one is the price we pay for a (hopefully) quiet end to the week.

Of the releases, October’s PCE price index stands out, being the FOMC’s preferred gauge of inflationary pressures – headline PCE is seen rising 2.3% YoY, a touch quicker than the pace seen in September, while the core metric is seen broadly unchanged at 2.8% YoY. That said, with the FOMC’s focus having shifted to the other side of the dual mandate, perhaps the weekly jobless claims report is of more interest, particularly with the continuing claims print coinciding with the November NFP survey week.

Also due from the States this afternoon are revisions to Q3 GDP data, along with the latest durable goods orders, and pending home sales prints $44bln in 7-year notes will also be auctioned off, following solid 2- and 5-year supply so far this week.