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Trend Reversal Rumbles Across Currency Markets

The dollar is continuing its ascent and global markets are in risk-off mode as traders unwind bets on easier monetary policy in the aftermath of Friday’s juggernaut jobs report. Futures are down sharply, Treasury yields are up, the greenback is trading near a three week high, and currencies elsewhere are on the defensive after the Bureau of Labor Statistics reported that employers added 517,000 jobs to payrolls in January, while revising previous months up.

Friday’s data looks too good to be true, with seasonal adjustment issues likely playing a role – but it nonetheless showed that underlying momentum in the American labour market remains far stronger than almost anyone had anticipated, helping support monetary tightening expectations across the curve. With the dust still settling, market-implied rates suggest the Federal Reserve will deliver at least two more quarter-point hikes before holding for a prolonged period. Investors still think the world’s most powerful central bank will begin cutting rates before year end, but doubts are beginning to creep in around the edges.

Chair Jerome Powell is expected to shed more light on the Fed’s response when he speaks at the Economic Club in Washington tomorrow. We suspect he will avoid a knee-jerk response to the data, preferring to remain focused on inflation numbers instead – but he could make surprisingly-hawkish noises, attempting to push back against the wholesale easing in financial conditions that occurred during last week’s press conference.

The British pound is down almost 2.9 percent from last week’s highs, despite this morning’s guidance from one of the most hawkish members of the Monetary Policy Committee. In a speech given in Budapest, Catherine Mann acknowledged signs of a moderation in US and European price pressures, but said inflation remained a threat in the UK, meaning “The consequences of under tightening far outweigh, in my opinion, the alternative” – and in a sentence that could prove meaningful in other jurisdictions, she added, “A tighten-stop-tighten-loosen policy boogie looks too much like fine-tuning to be good monetary policy”.

Japan’s yen tumbled last night when the Nikkei reported that the government had opened discussions with Bank of Japan Deputy Governor Masayoshi Amamiya about succeeding Haruhiko Kuroda as governor. Amamiya – often known as “Mr. BoJ” – is considered one of the more dovishly-centrist candidates for the role, having had a hand in devising and implementing many of the Bank’s policies in recent decades. Markets are slowly abandoning bets on a wholesale change in Japanese monetary policy as global inflation pressures subside and the manufacturing cycle slows.

There are no major economic data releases on today’s agenda, and the week ahead looks remarkably quiet. The Reserve Bank of Australia is almost universally expected to raise its cash rate by another quarter percentage point at this evening’s meeting. The Bank of Canada will release scheduled meeting minutes for the first time on Wednesday, but market participants don’t expect anything earthshaking (we’ve long suspected Canada’s central bankers spend the first five minutes of each meeting agreeing to follow whatever the Fed is doing, and the rest of the time arguing about hockey and Tim Horton’s orders). On Friday, the UK will report December growth data, Statistics Canada will release its latest jobs numbers, and the University of Michigan will publish an update to its consumer sentiment index.

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