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Dollar Slumps On Diminishing Tail Risks 

In yesterday’s Congressional testimony, Federal Reserve chair Jerome Powell warned markets not to expect rates to begin coming down in the near term, but acknowledged the need to “begin dialling back policy restraint at some point this year,” and said that central bankers remain “squarely focused” on their dual mandate. Market participants – who had been alert to the possibility of a pushback against easing financial conditions – breathed a sigh of relief, sending yields and the dollar lower for a fifth consecutive session. Broadly speaking, softer data releases and consistent messaging from Fed officials over the last week have contrived to lower “tail risks” in fixed income markets, reducing the likelihood of a sudden ramp in rate expectations.

The Canadian dollar is trading on a slightly stronger footing after the Bank of Canada refused to ratify expectations for an early-year rate cut. In yesterday’s post-decision press conference, Governor Macklem seemed to maintain a subtly-hawkish stance, but – much like pretentious wine snobs – market participants may have been reading too much into the subtle nuances, refusing to drink in the overall message. The economy remains mired in near-recessionary conditions, with businesses and consumers in retrenchment mode, but the risk of an exogenous financial conditions-driven melt-up remains too high to permit an early easing in policy. We still expect a rate cut at the Bank’s June meeting, and markets now agree – a June move is now roughly 75-percent priced in, with a total of 3 cuts assumed for the course of the year.

Growing confidence in a pivot at the Bank of Japan’s March meeting pushed the yen higher against the dollar for a third session last night. Cash earnings increased 2.0 percent year on year in January, accelerating sharply from a revised 0.8 percent rise in December, and solidly beating the 1.2-percent consensus forecast. Earlier in the day, the Rengo labour federation said its constituent unions were demanding an average 5.85-percent wage hike, topping 5 percent for the first time in more than 30 years. Central bank board member Junko Nakagawa said “We can say that prospects for the economy to achieve a positive cycle of inflation and wages are in sight,” and Governor Ueda said “If we confirm that a positive wage-inflation cycle is strengthening, we can examine modifying our massive monetary easing measures”. The exchange rate is trading above the 148 mark, and odds on a March interest rate hike are holding above 70 percent.

A rate hike still looks more likely to come between April and July, but we remain skeptical on the potential for a runaway move in the yen until a safe-haven dynamic comes back into play. A move into positive-rates territory won’t amount to firing the starting gun on a new tightening cycle, rate differentials will remain sharply tilted against the yen, and Governor Ueda has already warned of a willingness to use bond purchases to tamp down any unruly moves in yields.

The European Central Bank’s decision, out in 15 minutes, should be a snoozer. Policymakers are universally expected to leave all major policy settings unchanged, with officials following their global counterparts in warning that it’s too early to declare victory over inflation. Staff forecasts – which are expected to show lower growth expectations and an accelerated decline in price pressures – could prove more interesting, however, and euro traders are ready to press the sell button if President Lagarde clearly sets the stage for rate cuts in the post-decision presser.

The economic calendar is otherwise quiet. US statistical agencies are due to release weekly jobless claims and January trade data at 8:30, followed by a second day of Congressional testimony from Jerome Powell, an economic outlook from the Cleveland Fed’s Loretta Mester, and Joe Biden’s State of the Union address this evening.

Tomorrow’s February payrolls number could play a critical role in determining short-term market direction for the yen, euro, and dollar. Expectations for the headline jobs gain have climbed over the last week, with the consensus estimate now pushing above the 200,000 threshold – a number that could bolster bets on a re-acceleration in the US economy and trigger an upward shift in the Federal Reserve’s ‘dot plot” forecast for interest rates over the remainder of the year. A disappointment might see yields retrace some of their early-year moves, with ‘dollar smile’ dynamics pulling the greenback lower as expected growth differentials converge.

Still Ahead


A raft of speeches and appearances have convinced us that the European Central Bank’s policy committee is not prepared to begin easing policy in March, with a June move remaining far more likely. Inflation in the bloc failed to retreat as much as had been hoped in February, employment markets remain strong, and consumer surveys are pointing to a modest improvement in sentiment. Updated staff projections, released after the meeting, should bear the imprint of downward revisions in inflation and growth forecasts however, helping to set the stage for an eventual pivot to rate cuts. (08:15 EDT)


After January’s blockbuster 353,000-job print, February’s non-farm payrolls report could look rather disappointing. Markets think roughly 170,000 positions were added in the month, with the unemployment rate holding at 3.7 percent and hourly average earnings softening to near-zero-percent levels after a suspiciously-strong 0.6-percent gain. Revisions could also make a serious dent in the prior month’s data. But with job growth continuing to outpace an expanding workforce, the labour market’s apparent momentum remains strong. (08:30 EDT)

Canada’s labour market may have added jobs in February, but faster population growth likely pushed the unemployment rate higher. Consensus estimates seem to be aligned with a 20,000-position monthly gain – down from 37,300 in January – but conviction is understandably extremely low after a long series of surprises. We’re more confident in a rise in the unemployment rate, with a move up to 5.8 percent from the previous 5.7 percent looking likely as population growth continues to outpace the economy’s job creation engine. (08:30 EDT)

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