Who pays the bill?

Canada joined the global political gloom. The sudden resignation of the finance minister on Monday started raising questions about Trudeau’s leadership as politicians there try to find ways to deal with economic slowdown topped by Trump’s tariff threats. Happily for the Bank of Canada (BoC), inflation dropped below the 2% target for the second time in three months hinting that the central bank could at least remain supportive when politicians are not. The USDCAD spiked to the highest levels since the pandemic. The Loonie is now oversold versus the US dollar and retreats very rapidly against the euro since the November peak. Oil prices aren’t adding to the selloff these days, but they are not helping either. As such, the political problems pave the way for further Loonie weakness, price pullbacks in the USDCAD and EURCAD could be interesting opportunities to jump on the trend.

A bit lower on the map, Brazil intervened to stop the bleeding of the real after the currency tanked more than 20% against the greenback to an all-time-low this year. Ballooning debt and deficit are taking a toll on the country’s finances as – remember – not everyone can balloon debt infinitely and make the rest of the world pay for it. This is the major differences between what we call developed countries and their emerging market peers.

Because look, the French National Assembly just adopted a stopgap budget bill to avoid a government shutdown from January as the French politicians took down a government that tempted to control, and to narrow the budget deficit. And yet, the French 10-year yield – though higher on the latest shenanigans - is not alarmingly higher. The outlook for France is not brilliant, however.

Investors in the US have a different problem: the retail sales, there, has again been higher than expected by analysts, again pointed at resilient consumer spending and again highlighted the needlessness of another rate cut from the Federal Reserve (Fed) today. But the Fed will announce a 25bp cut no matter what.

The more the Fed’s rate cuts diverge from economic fundamentals, the stronger the hawkish expectations for the future become. Some expect that the Fed could cut only twice next year while others think that the Fed’s premature and rapid cuts will require a rate hike next year. But I would be surprised to see a meaningful reversal in the Fed’s rate cutting plans at today’s announcement. In the worst-case scenario, Fed officials might signal one fewer rate cut on average for next year. I expect them to stick to the familiar ‘inflation is moving toward target’ rhetoric at this pre-Xmas meeting, paving the way for the Santa rally to unfold.

The S&P500 and Nasdaq eased yesterday as the US 2-year yield shortly spiked to 4.30%, Broadcom retreated nearly 4% but after a 38% rally in the previous two sessions, while Nvidia extended gains in the correction territory. If you are asking when is it a good time to buy a dip in Nvidia, I would say near $120 per share, that matches the 23.6% retracement on the AI rally. It’s still a 7.5% away from yesterday’s close near $130 per share.

In Europe, the Stoxx 600 remains downbeat and is about to test the 500 to the downside, as the Xmas magic is really not operating in Europe this year. The EURUSD hovers between gains and losses around 30 pips around the 1.05 psychological mark. The Fed’s decision will probably give a fresh direction to the pair. A sufficiently accommodative Fed statement and dot plot could give support to the EURUSD and help it to recover above the 1.05 mark – that’s my base case scenario. But if the Fed turns realistically less dovish – both of which is not their thing – we could see the US dollar extend gains and pave the way for a further downside correction in the EURUSD. If that’s the case, the parity bets will rapidly come back to the headlines.

Across the Channel, the figures come in but they are not easy to interpret. Yesterday’s jobs data looked strong with strong employment, low claims and nice earnings growth figures. And along with today’s inflation print dashed the likelihood of another rate cut this week from the Bank of England (BoE). But the private sector shed nearly 200’000 jobs this year – perfectly in contrast with the public sector. It’s obviously not good news for the economy and demands some support from the BoE – a support that the BoE won’t provide easily to balance out the government’s spending plans unless the economy weakens due to tax hikes before it improves thanks to spending. Looking at the chart, we are about to see a death cross formation on the daily chart – where the 50-DMA is about to dive below the 200-DMA – hinting that the selloff could accelerate and send Cable toward the 1.25 on worries that the UK economy will weaken before it rebounds.