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Currencies Stabilize As Pivotal Week Begins

Investors are bracing for a momentous week, with Jerome Powell’s Congressional testimony, three major central bank meetings, and the February non-farm payrolls report combining to set the stage for erratic price action in currency markets. The dollar is climbing, yields are ticking lower, and the euro and pound are tightly rangebound.

Commodity-linked currencies sold off over the weekend as China’s leadership unveiled a more cautious growth agenda than had been expected. Work documents released during the National Party Congress outlined plans to increase state outlays and expand the budget deficit, but Beijing set its headline gross domestic product target at around 5 percent – disappointing commodity bulls who had been hoping for a more aggressive round of stimulus spending. Copper, iron ore, and zinc prices tumbled, while the major oil benchmarks came under selling pressure as demand expectations were ratcheted down.

US manufactured goods orders are seen falling -1.8 percent in January after climbing 1.8 percent in December, with typical seasonal volatility obscuring any signal beneath the noise.

Markets think the Reserve Bank of Australia will raise its cash rate by another quarter percentage point this evening, but a recent softening in local data suggests a modestly-dovish adjustment in forward guidance could be in order. Despite a small recovery on Friday, the Australian dollar is trading near the bottom of its trading range against the dollar as commodity prices weaken and domestic sentiment surveys turn down.

Jerome Powell is likely to wear his hawk costume when testifying on Capitol Hill tomorrow and Wednesday. Markets expect the Fed chair to join his colleagues in outlining the threat that a re-acceleration in price pressures could represent, while expressing a willingness to ratchet policy tighter than many had anticipated only six weeks ago. Last week, Atlanta Fed President Raphael Bostic said “Jobs have come in stronger than we expected. Inflation is remaining stubborn at elevated levels. Consumer spending is strong. Labor markets remain quite tight”. And on the weekend, San Francisco’s Mary Daly warned “It’s clear there is more work to do. In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”

If prior iterations of the Humphrey Hawkins testimony (as the semi-annual monetary policy report is colloquially known) are any indication, Powell may look like the only adult in the room, under attack from the left for raising rates too quickly and from the right for raising them too slowly.

The Bank of Canada is expected to stay on hold at Wednesday’s meeting, but could choose to emphasize the “conditional” nature of its current policy stance – a move that might bolster odds on another rate hike in coming months. Although policymakers are likely to downplay the importance of January’s blockbuster jobs report, signs of economic resilience will be difficult to ignore. Most observers expect the Canadian economy to weaken as the year progresses, with rising household debt service costs weighing on consumption and business investment. The loonie has inched steadily lower in recent trading sessions, suggesting that investors are growing more skeptical on the likelihood of a sustained improvement in domestic growth data.

Haruhiko Kuroda might deliver another hawkish surprise at his last meeting as Bank of Japan Governor, but we suspect he will keep policy unchanged. Implied volatility in options markets has risen around this week’s meeting, with some market participants betting that a decisive adjustment in the central bank’s long-running yield curve control policy could trigger a surge in the yen – but with several policymakers recently emphasizing the transitory nature of Japan’s inflation pressures, we don’t think anything significant is likely in the pipeline.

And after generating 517,000 jobs in January, consensus estimates suggest the US added another 215,000 jobs last month, but the range of possibilities remains wide. Less vulnerable to surprise, the unemployment rate is expected to hold near 3.4 percent, and average hourly earnings could hold steady at 0.3 percent.

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