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Dollar’s Fade Continues Ahead of Jobs Numbers

The dollar is stuck in a defensive posture after Federal Reserve chair Jerome Powell sounded slightly more dovish in his second day of Congressional testimony yesterday. “We’re waiting to become more confident that inflation is moving sustainably to 2 percent,” he told the Senate Banking Committee. “When we do get that confidence – and we’re not far from it – it’ll be appropriate to begin to dial back the level of restrictiveness”.

This morning’s non-farm payrolls number could make or break the dollar’s decline. Expectations for the headline jobs gain have crept above the 200,000 mark this week, but the report has crushed forecasts for two months running, and a third consecutive surprise remains entirely possible. A print above 225,000 – without major revisions to January’s data – might reinforce “no landing” narratives, sending the dollar and Treasury yields higher. Alternatively, a sub-175,000 result, especially if compounded by extensive revisions, could add to the recent spate of softer data in bolstering bets on an earlier pivot to monetary easing.

Long-standing trends are reversing elsewhere in currency markets as policy expectations begin to diverge:

The euro is clinging to gains achieved yesterday after the European Central Bank left its major policy settings unchanged and signalled it wouldn’t begin cutting rates before June. Speaking during the post-decision press conference, President Christine Lagarde warned it would take time to determine whether inflation risks had truly subsided, saying “We clearly need more evidence, more data… We will know a little more in April but we will know a lot more in June”. Market views were only modestly adjusted this morning after Finland’s Olli Rehn said “There have also been voices in the discussion that the ECB could not lower interest rates before the Fed, the US central bank. Rumours about this are greatly exaggerated: The ECB is not the Fed’s 13th Federal District”.

The British pound is trading at its highest levels since August as market participants bet the Bank of England will lag the Federal Reserve in slashing interest rates. Data set for release next week is expected to show the economy building momentum in January, with wage growth showing signs of stickiness – factors that could force officials to move cautiously in reducing monetary restrictiveness before the summer months. Markets now believe that Governor Bailey will announce the first rate cut in August, slightly after Jerome Powell does the same in the United States.

Barring a US jobs shock, the yen looks set to end the week with its strongest gains this year. Markets have sharply upped odds on a March rate hike from the Bank of Japan after a series of leaks suggesting that several board members have expressed support for a move out of negative rates territory. Hints of strong wage growth in the country’s spring Shunto negotiations could seemingly clinch the deal.

The Canadian dollar is also stronger, with its long-standing negative correlation with US yields helping support relative outperformance. All else being equal, this morning’s jobs report could cool things off a bit though, with a small headline gain likely failing to offset a rising unemployment rate and slowing wage gains adding to the case for earlier easing from the Bank of Canada.

Next week will bring the latest US inflation report and retail sales numbers, but beyond the aforementioned UK releases, the calendar looks fairly barren. If price growth and consumer spending show signs of slowing from previously-overheated levels, an acceleration in the dollar’s decline could be in the offing.


Still Ahead

FRIDAY

After January’s blockbuster 353,000-job print, February’s non-farm payrolls report could look rather disappointing. Markets now think roughly 200,000 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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Twists & turns

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