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Liquidity Ebbs Into Holiday-Shortened Week

The trade-weighted dollar is holding steady and equity futures are poised to open lower as market participants prepare for a lower-intensity, holiday-thinned trading week. Treasury yields are ticking higher, oil prices are up modestly, and risk-sensitive units like the Canadian dollar are trading sideways ahead of a week dominated by the release of the Federal Reserve’s preferred inflation indicator – when North American markets will be closed for Good Friday.

Thin liquidity could boost the appeal of safe haven currencies in the days ahead, but some mean reversion could play out over a longer time horizon. With the global economy entering what resembles a “muddle through” period, growth differentials narrowing slightly, and central banks singing off the same hymnbook, we think the dollar could begin underperforming on a more sustained basis – in the absence of a deeper growth or volatility shock, last week’s gains are unlikely to last.

Japanese officials stepped up jawboning efforts over the weekend, raising the likelihood of direct currency intervention if the exchange rate continues its slide. Vice minister for international affairs Masato Kanda warned “The current weakening of the yen is not in line with fundamentals and is clearly driven by speculation. We will take appropriate actions against excessive fluctuations, without ruling out any options”. The central bank last intervened in currency markets in 2022 when the dollar-yen exchange rate neared the 152 threshold, and is currently trading just north of 151. With carry returns remaining spectacular even after the Bank of Japan hiked rates last week, we suspect there’s no “line in the sand” at 152. Authorities are likely aware of the fundamental pressures arrayed against the currency, and will only respond to signs of volatility, or “disorderly” moves in markets.

China’s yuan is recovering from Friday’s losses as authorities signal renewed support. The People’s Bank of China last night set the renminbi fix – the midpoint in a 4-percent trading range – at 7.0996 against the dollar, up from 7.1004 in the prior session, and the onshore spot rate climbed to 7.19, up sharply from the near-7.24 level reached at one point last week. State-owned banks are reportedly buying the currency to provide lift, but history would suggest that this activity could be relatively modest in scale if policymakers intend to maintain competitiveness relative to the Japanese yen.

Both the pound and euro remain on the defensive. Sterling is consolidating at weaker levels after the Bank of England’s policy committee turned decidedly less hawkish in last week’s meeting and Governor Bailey said “rate cuts are in play” for future decisions, while the euro continues to take its cues from US rate developments. With a June rate cut firmly priced in for the European Central Bank, shifting odds on a similar move from the Fed are driving the exchange rate more than domestic developments in the euro bloc.

The week ahead is largely bereft of first-tier releases. A number of Fed officials are scheduled to speak, helping provide insight into the thinking behind last week’s decision, culminating in an appearance from Jerome Powell on Friday. Earlier on the same day, an update in the central bank’s preferred inflation indicator – the personal consumption expenditures index – should show inflation cooling in month-over-month terms while accelerating on a three-month average basis, helping justify a cautious approach to cutting rates.


Still Ahead

TUESDAY

Headline durable goods orders are seen rebounding in February, recovering from the prior month’s -6.2 percent loss as Boeing’s sales pull out of their tailspin. With transportation excluded, markets expect a 0.4-percent increase to offset January’s -0.4-percent drop. (08:30 EDT)

The Conference Board’s consumer confidence measure may have softened in early March, with cooling labour markets and stubbornly-high inflation levels taking a modest toll. Markets expect the headline index to rise from 106.7 to 107, but we think risks are tilted to the downside. (10:00 EDT)

THURSDAY

The Canadian economy probably grew slightly slower than Statistics Canada’s 0.4-percent early estimate in January, and with the rebound largely coming from a cessation in public sector strike activity, it should remain clear that all is not well in the broader economy. February’s preliminary number might look better though – oil prices are up, housing markets are seeing a flurry of activity, and the number of hours worked is rising. We don’t rule out an early-year rebound in growth that tops the Bank of Canada’s last 0.5-percent estimate for the first quarter. (08:30 EDT)

Canada SEPH January’s Canadian Survey of Employment, Payrolls and Hours should show job vacancies declining further, while wage growth continues to soften. (08:30 EDT)

FRIDAY

The Federal Reserve’s preferred inflation indicator – the core personal consumption expenditures index – likely slowed in February, with early estimates suggesting that the month-over-month increase dropped to 0.3 percent, down from 0.4 percent in the prior month. Surprises are unlikely: both the consumer price index and producer price index anticipate the print, and during last week’s post-decision press conference, Jerome Powell said he expected a print “well below 30 basis points,” suggesting that the seasonal issues that plagued January’s report would begin to fall out of the data. Strong hiring, hours worked, and wage growth should help keep the personal income and expenditures numbers aloft, pointing to continued resilience in US consumer spending levels. (08:30 EDT)

North American markets are closed for Good Friday, and currency market liquidity will be thin, potentially exaggerating the impact of any unusual developments.

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