USD: A tight Fed vote coming
November closed with markets catching their breath after weeks of anxiety over AI valuations and shifting Fed cut expectations. Yet December began on a weaker footing, as a renewed cryptocurrency selloff and hawkish signals from the Bank of Japan weighed on sentiment. The yen led gains against the dollar after Japan’s two‑year bond yield climbed to its highest level since 2008.
Equities ended November strongly: the S&P 500 rose 4% for the week, its best Thanksgiving performance since 2012, while the Nasdaq surged more than 5%. With panic subsiding, the U.S. dollar has eased from recent highs, underscoring the sense that the past two weeks served as a safety valve. For now, fears of an “AI bubble” have faded, but was that the end of the equity pullback?
Market narratives continue to shift sharply. Within the hyperscaler complex, performance has diverged: Google has gained 54% over the past three months, while Meta and Oracle have lost ~18% and ~15% respectively. Investors are increasingly focused on capital efficiency, showing little appetite for firms that rely on credit issuance to fund AI ambitions. Looking ahead to 2026, the story is evolving from “buy everything AI” to a forensic audit of CapEx ROI.
On the macro front this week, ISM surveys should stay mixed, with manufacturing still contracting. Wednesday’s ADP payrolls is one of the key risk events, (consensus 10K for the month of November), while Thursday’s Challenger cuts may add dovish tone. Friday’s core PCE should hold near 0.2% m/m, consistent with muted CPI/PPI recent prints.
The second major narrative shaping markets is the shifting outlook for the Federal Reserve. Last week delivered mixed macro signals. The Fed’s latest Beige Book pointed to a softening labor market and an uneven, “K-shaped” economy, hardly a backdrop that would compel policymakers to push back against the market’s increasingly dovish expectations.
Looking ahead to December, the stage is set for a potentially dramatic meeting. Swaps markets are pricing in a 90% chance of a rate cut, but don’t expect a quiet meeting.
A razor-thin vote, perhaps 7-5, could emerge as the committee wrestles with balancing a weakening labor market against stubborn inflation.
The real question: will Chair Powell validate the market’s hunt for a terminal rate below 3%? If he does, the dollar could have room to slide as rate differentials compress, potentially eroding the post-summer resilience of the U.S. dollar index and nudging it toward a more fundamental alignment. However, it’s key to note that while markets were pricing in aggressive normalization from the Fed, the U.S. dollar still held up within its 6-month trading range.
Paradoxically, the latest data only adds to the complexity. With the government is fully operational again, and data collection is underway, last week’s jobless claims came in at 216,000, one of the lowest readings this year. In any other cycle, this would be the “desert-island indicator” screaming economic strength. Yet today, it’s largely ignored because it doesn’t fit the prevailing narrative of a deteriorating labor market that justifies rate cuts. Instead, financial media has shifted its spotlight to other stress points, such as affordability concerns, leaving this report to gather dust.
That affordability debate is loudest in housing, where the disconnect is striking. While home prices have eased slightly from record highs in major cities, the Atlanta Fed estimates home median prices have still climbed more than 30% since 2021 to nearly $400,000. To comfortably afford that, a household needs an income north of $120,000, yet the median sits at just $85,000. It paints a picture of an economy that defies easy interpretation: resilient on paper if you look at jobs, punishing on the wallet if you look at homes.
CAD: Trade dynamics mask domestic weakness
The Canadian economy surprised sharply in Q3 2025, posting 2.6% annualized growth versus expectations of just 0.5%. This rebound followed a -1.8% contraction in the prior quarter, immediately sending the Canadian dollar past the 1.40 mark against the USD. Despite the strong headline, underlying domestic weakness remains evident.
Growth was driven almost entirely by trade dynamics. Imports fell 2.2% (an annualized -8.6%), contributing nearly three percentage points to GDP, while exports rose only 0.2%. Higher energy prices improved the terms of trade, and government spending surged, with capital investment up 2.9%, including an 82% jump in defense outlays. These factors masked soft private sector activity.
Final domestic demand slipped 0.1% annualized, reflecting weak household consumption and flat private investment. Consumer spending fell 0.1% (0.4% annualized), dragged down by lower vehicle purchases, while business investment stagnated amid declining confidence. Per‑capita spending dropped 0.2%, and real disposable income was flat, leaving households only modestly above pre‑pandemic levels but still well below trend.
For policymakers, the headline strength complicates decisions. The Bank of Canada faces pressure to hold rates steady in December, even as domestic demand falters. Fiscal stimulus will continue to support activity, but October’s preliminary estimate of a 0.3% monthly contraction sets a weak base for Q4, suggesting overall growth will hover near 0% in the final quarter of the year.
This week attention turns towards the employment report (Fri) for the month of November.
MXN: Weak economic outlook
Based on the Banco de México (Banxico) Quarterly Report for July – September 2025, the highlights reveal a significant slowdown in Mexico’s economy and a mixed but improving inflation outlook. The central bank reported that Mexico’s economic activity contracted in the third quarter of 2025, primarily due to a drop in the industrial sector. Consequently, Banxico lowered its 2025 GDP growth forecast to a central estimate of just 0.3%, reflecting deeper-than-expected weakness in the economy and continued signs of a cooling labor market. This subdued economic performance is being exacerbated by persistent external uncertainty, particularly from trade tensions and changes in U.S. commercial policy, which pose a key downside risk to growth.
On the inflation front, the report shows progress in bringing price pressures down, with annual headline inflation falling to 3.61% and returning to the central bank’s variability range. This reduction was mainly driven by a significant decline in the non-core component (such as energy and fresh food). However, the fight is not over, as core inflation edged up to 4.25% due to stickiness in merchandise prices. Despite this, Banxico maintained its expectation that headline inflation will converge to the 3% target by the third quarter of 2026. The financial environment saw the Mexican peso appreciate and government bond yields fall, as international financial conditions eased amid expectations of further interest rate cuts abroad.
The USD/MXN pair is currently in a phase of short-term consolidation, trading near 18.3. This follows a multi-month period of significant strength for the Mexican Peso (the “Super Peso”). Technically, the pair has stabilized within a tight, sideways range defined by key resistance near 18.76 and major support around 18.20. This neutral price action is reinforced by technical indicators like the Relative Strength Index (RSI), which sits near the 50 level, confirming that market momentum has stalled and buying and selling pressures are currently balanced. This consolidation occurs against a backdrop of mixed economic signals, as Banxico cited external uncertainty as a key downside risk to growth.
Despite the weak growth outlook, the Mexican Peso looks overvalued relative to its longer-term history, trading at a significant discount of -4.8% below the one-year average of 19.43 and -3.5% below the five-year average of 19.16. This deviation from the mean suggests that a strong bid for emerging market assets has dominated market sentiment in 2025, establishing a robust value foundation.
Combining the technical stability and the strong underlying fundamental value proposition suggests the Peso will continue to oscillate within its 18.20 to 18.76 range in the immediate term. Markets are currently consolidating while they await confirmation that the high-yield carry trade momentum will persist into 2026, navigating the conflict between strong currency valuation and cooling domestic economic activity highlighted in the recent Banxico report.
US Dollar drifts lower to begin month
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: December 01 – 05
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
