FX Commentary - March 5, 2018
Last week saw the U.S. dollar continue a rebound from multiyear lows against a backdrop of rising treasury yields and tumbling equity markets. Federal Reserve Chairman, Jerome Powell, testified before congress last week in his first public appearance as chairman, offering a hawkish view on the American economy and keeping alive hopes of an accelerated schedule of rate hikes from the Fed. Specifically he noted that, “the central bank can continue gradually rising rates as the outlook for growth remains strong” moreover he stated that “market volatility won’t stop more rate hikes.” In response, the Dow shed 250 points.
In a mixed week for U.S. fundamental data core inflation remained at a tepid 1.5% while consumer confidence read the highest since 2000, perhaps suggesting consumers aren’t quite as concerned with inflation as the central bank. Weekly jobless claims printed a 49-year low, highlighting the strength of American labor markets which has largely underpinned the aforementioned confidence amongst consumers. The pace of pending homes sales fell to a 4 year low in January and will remain a data point to monitor moving forward as analysts assess the impact on the housing market of rising interest rates and thus mortgage rates. A jobs report this Friday should provide further confirmation that the Fed has reached the second part of its mandate with the unemployment rate expected to inch down to 4%. Until then however, the U.S. dollar will see few opportunities for upward data surprises and may find itself exposed to political risks. The big story coming into the week is President Trump’s talk of imposing heavy tariffs on steel and aluminum which could threaten to incite further trade wars. The protectionist rhetoric lifted the dollar against emerging market and commodity currencies, while weakening it against other reserve currencies, in particular the euro and yen.
Bearing the brunt of Trump’s trade talk has been the Canadian dollar, which has opened this week nearing 8 month lows against the U.S. dollar. Fourth quarter GDP growth arrived at 1.7% annualized, below a consensus 2% and well below the Bank of Canada’s projections of 2.5%. A slump in crude oil also weighed heavily on commodity linked-currency. Trump’s latest talk of steel and aluminum import tariffs further threatens the Canadian economy amidst the backdrop of ongoing NAFTA uncertainties. Given economic moderation and trade uncertainties, the Bank of Canada is expected to retain its data-dependent approach and stand pat at its meeting this Wednesday. This week’s decision will not be accompanied by a press conference or economic projections so markets may look to an address by Deputy Governor, Timothy Lane, to the Vancouver Board of Trade on Thursday for further insights to the bank’s decision. Important data on housing will be released Thursday, followed by a labour survey Friday. As housing activity still accounts for the majority of growth in the Canadian economy, the releases could well be indicative of the pace of economic moderation for the first quarter.
Taking center stage on Thursday, the European Central Bank will be the third of four major central banks making interest rate decisions this week. Despite recent turbulence, the euro has rallied starting the year as the Eurozone experiences a strong and synchronized economic expansion. Markets will look for any change in forward guidance communicated by ECB President, Mario Draghi, as expectations mount for monetary policy in Europe to phase out of gradual cautiousness. Political developments over the weekend delivered a mixed set of news which could perhaps complicate the Eurozone’s near-term stability. In Germany, the Social Democratic Party voted to form another coalition government, securing Chancellor, Angela Merkel, a 4th term in power and ending months of political deadlock. However, the political risk has now transferred to Italy—the Eurozone’s third largest economy—as Italy’s general elections on Sunday showed a surge in populist parties albeit proving indeterminate.
Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast
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