The Donald Trump show is returning for a four-year term beginning January 2025, but for all intents and purposes, he is driving all market activity now. Traders forgot about the Fed decision to cut rates by 25 bps and largely ignored top-tier economic data releases, focusing instead on Trump’s tariff plans and his Cabinet picks against a tense geopolitical backdrop. However, US dollar gains may have been exaggerated by the loss of liquidity due to the Thanksgiving holiday.
The Trump trade fueled a broad-based rally in the US dollar, which was exacerbated by ECB politicians advocating for rate cuts and safe-haven demand due to escalating tensions between Israel and Lebanon.
Wall Street soared, with the S&P 500 rising 5.7%, its best monthly performance in 2024. The rally was fueled by pro-business policies, including anticipated corporate tax cuts and deregulation, which investors expect to stimulate economic growth.
Equity analysts are bullish. They anticipate Fed rate cuts in a business and tax-friendly US environment, which will propel the S&P 500 to above 6500 next year.
The USD and Federal Reserve
The US dollar index (DXY) extended its October rally and continued higher until the last week of the month, posting a 4.5% gain from November 5 to November 22. Prices retreated during the American Thanksgiving holiday, with month-end portfolio rebalancing flows weighing on the index.
The FOMC meeting is on December 18 and comes complete with a new set of forecasts in the Summary of Economic Projections. The Fed is expected to cut rates by 25 bps to 4.50%, despite any incoming data prior to the meeting suggesting a pause could be justified. That’s because they need freedom to maneuver when the new administration takes over. The prospect that some of Trump’s policies could reignite inflation is a risk they will need to consider.
The Canadian Dollar and Bank of Canada
The Canadian dollar got smashed in the last week of November after Trump tweeted that he would impose 25% tariffs on Canada (and Mexico) on January 20, his inauguration day. He blames both countries for having lax border security that allows drug smugglers and illegal immigrants to enter the US. USDCAD spiked to 1.4178 in the wake of the news and has traded in a 1.3940–1.41 range since.
Prime Minister Trudeau met with Trump on November 30. Trump said they had a “very productive meeting,” but the specter of 25% tariffs on all Canadian exports is hanging over monetary and fiscal policy.
Economists and analysts are scrambling to put a positive spin on Canada’s lack of economic growth. Canada GDP rose a mere 1.0% y/y in Q3 and just 0.1% m/m in October, prompting some analysts to predict another 50 bp rate cut on December 11. Others suggest just 25 bps because previous rate cuts and the upcoming GST holiday (on some purchases) may give the economy a boost.
The Canadian dollar is likely to remain in its well-defined USDCAD range of 1.3960–1.4160 for all of December, although the topside is vulnerable.
Oil Prices
WTI oil prices traded erratically in a $67.00–$72.50 range in November but have a negative bias due to expectations that OPEC increases production on January 1, while renewed Chinese demand fails to materialize. The risk of a Middle East supply disruption event has diminished somewhat, with Israel and Lebanon (Hezbollah) agreeing to a ceasefire. WTI has strong support at $65.00.
Bank 2024-USD/CAD Q4 2025-USD/CAD Q1
Scotiabank* 1.3900 1.4100
BMO 1.3900 1.4100
CIBC 1.4100 1.4000
TD Bank* 1.3800 1.4100
National Bank 1.4100 1.4500
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
