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Conflicting narratives keep dollar rangebound

The trade-weighted dollar flatlined overnight as optimism surrounding China’s reopening process helped offset cautious commentary from Federal Reserve officials. The pound and euro are giving back some of yesterday’s gains as falling inflation prints put pressure on yields, and the Canadian dollar is down slightly on the day – but has gained on a year-to-date basis along with other commodity-linked currencies.

Currency markets shrugged yesterday when a record of the Federal Reserve’s December meeting was released, showing that officials thought “substantially more evidence” of easing inflation would be needed before rate hikes could pause. Central bankers warned “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability” and the minutes noted, “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023”. Yields fell and the dollar slipped, suggesting that markets think inflation will subside anyway, and aren’t convinced the Fed’s “higher for longer” message will survive contact with an economic downturn.

Data earlier in the session painted a complex economic picture, with the number of job openings topping forecasts even as the manufacturing sector moved further into contraction. According to November’s Job Opening and Labor Turnover Survey, the number of available positions fell to 10.46 million, down only very slightly from a revised 10.51 million a month earlier. Separately, the Institute for Supply Management’s manufacturing index fell to 48.4 in December, tumbling further into the red as the prices paid, new orders, and production components fell in unison.

China’s yuan is trading near a four-month high as investors look past a painful reopening period toward a stimulus-fuelled rebound later in the year. Onshore share prices are climbing and global raw materials prices are gaining as policymakers make comforting noises about providing more economic support.

Republicans are again struggling to manage an orderly transfer of power, after Representative Kevin McCarthy lost a fourth, fifth and sixth ballot yesterday in the race to become House Speaker. Markets remain generally unworried, but concessions made to party hardliners now will raise the stakes ahead of what could become an intractable debate around raising the debt ceiling later this year. We note that previous such standoffs have failed to result in any meaningful reduction in deficits, and instead typically end with new spending concessions agreed between the parties.

Today’s economic calendar is relatively quiet. Initial jobless claims, out at 8:30, are expected to hold at 225,000 in the week ended December 31. The US trade deficit probably narrowed to less than $65 billion in November as oil prices fell. Fed speakers include Bostic and Bullard – both of whom could pick up a theme from the December meeting minutes, rhetorically tilting against an “unwarranted easing in financial conditions”.

Markets think the US job-creation engine kept humming in December, even as the formerly high-flying technology sector began to lay off employees. Consensus ahead of tomorrow’s December non-farm payrolls report is sitting around the 200,000 mark, down slightly from the prior month, but still remarkably strong, and far from levels that would normally be considered consistent with an incoming recession. A stronger print could help lift odds on a half-percentage-point move at the February meeting, and provide some lift to the dollar.

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