• Ukraine made its first tactical ballistic missile strike within Russian territory, raising fear Russia retaliates with the nuclear option.

• JPY outperforms. Treasuries and gold rally. Equity markets sell-off.

• Canada’s October CPI print will guide near-term Bank of Canada rate expectations.

USD firmer against most major currencies except JPY. USD/JPY fell 0.9% with the next major technical support offered at 151.88, the 200-day moving average. Treasuries rallied across the curve and equity markets are selling-off. The war between Ukraine and Russia took a dangerous turn. Ukraine struck inside Russian territory using American-made long-range missiles. The strike came shortly after Russian President Putin approved an updated nuclear doctrine. Putin signed today a decree allowing Russia to fire nuclear weapons if it was subject to a conventional missile attack on its territory.

The U.S. TIC data showed underlying demand for the dollar is robust. Net foreign purchases of long-term U.S. securities increased to a one year high at $1041bn in the 12-month to September vs. $793bn the previous month, eclipsing the cumulative U.S. September trade deficit of US$855bn.

The surge in net foreign purchases of long-term U.S. securities in September was driven by private sector purchases of Treasury bonds and U.S. equities. Moreover, foreign investors remain largely unfazed by the chronic U.S. fiscal imbalance. Foreign holdings of U.S. Treasuries rose to an all-time high of $7.5 trillion in September.

U.S. October housing starts and building permits are today’s data highlights (8:30am New York). Kansas City Fed President Jeff Schmid (2025 voter) gives a speech on the economic outlook and monetary policy (1:10pm New York).

EUR/USD and GBP/USD retraced most of yesterday’s relief rally. Nonetheless, EUR will remain under downside pressure versus USD and GBP in part because the ECB is more dovish than the Fed and BOE. ECB Governing Council member Vujcic warned yesterday “certainly the risk of undershooting the target has now increased compared to six months ago”.

Meanwhile, ECB Governing Council member Stournaras noted that the neutral rate is on average at about 2%. This means the ECB policy rate is currently too restrictive at 3.25%, heightening the downside risk to the Eurozone economy. Indeed, ECB Governing Council member Panetta emphasized today that “restrictive monetary conditions are no longer necessary…We need to normalize our monetary policy stance and move to neutral – or even expansionary territory, if necessary.”

In contrast, comments by BOE Governor Bailey reinforced the case the BOE may pause easing at its December 19 meeting. Bailey cautioned that one year-ahead expectations for wage growth of firms in the Bank’s Decision Maker Panel “point to lingering persistence in wage pressures beyond what we are assuming in our projection.” Risk of stickier than expected wage growth has given Bailey “cause to reflect”. Bailey added that the uncertainty with how the increase in employer National Insurance Contributions could play out in the economy argue for “a gradual approach to removing monetary policy restraint.”

CAD and Canadian bonds will take their cue today from Canada’s October CPI print (8:30am New York). Headline inflation is expected at 1.9% y/y vs. 1.6% in September while core inflation (average of trim and median CPI) is anticipated at 2.4 y/y vs. 2.35% in September. The Bank of Canada (BOC) projects headline and core CPI inflation to average 2.1% and 2.3% over Q4, respectively.

Overall, the BOC has room to dial-up easing because inflation is now close to 2%, and inflationary pressures are no longer broad-based. Additionally, monetary policy remains too tight, heightening the downside risk to the economy. At 3.75%, the BOC policy rate remains above the bank’s nominal neutral interest rate estimate of 2.25% to 3.25%. Cooler than expected inflation in October can reinforce the case for a 50bps BOC rate cut at the December 11 meeting and undermine CAD. Market is pricing-in about 40% odds of such a cut.

AUD/USD is trading heavy around 0.6500 on heightened geopolitical tensions. The RBA Minutes of the November 6 policy meeting supports the case the RBA is in no rush to start easing policy. Members noted that a faster than currently forecast decline in inflation “could warrant an easing in the cash rate target, but that they would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” Australia’s Q3 CPI tracked the RBA’s forecast. The Q4 and Q1 CPI prints are due end-January and end-April, respectively. This indicates that the RBA is likely to wait until after the release of the Q1 CPI data before considering rate cuts, likely at its May 7 policy meeting. RBA cash rate futures imply a first full 25bps cut in May.

National Bank of Hungary is expected to keep rates steady at 6.50% (8:00am New York). At the last meeting October 22, the bank kept rates steady and said that “In the Council's assessment, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates.” Deputy Governor Kandracs stressed that “We’re not at all afraid to maintain the current base interest level for an extended period.” The swaps market is pricing in 50bps of cuts over the next 12 months followed by another 25bps over the subsequent 12 months that would see the policy rate bottom near 5.75%.