- Central bank rate decisions mark the calendar this week, with four policy meetings set to inject volatility in FX markets.
- The US labor market figures for February cap off a week in which the news wire, thanks to comments about NAFTA and trade tariffs, will be a prominent influence.
The Reserve Bank of Australia is expected to keep rates unchanged at 1.50% on Tuesday as the country’s growth outlook hasn’t evolved that much in recent weeks. The labor market continues to improve gradually, and it is expected that the unemployment rate will fall further in the coming years. However, with real wage growth continuing to struggle, Australian consumers face some challenges ahead. Accordingly, the RBA is unlikely to want, or need, to change its policy stance in the near future. Rates markets are not pricing in any shift in policy at until December 2018 (56% chance of a rate hike; November 2018 hike odds are currently 36%).
The Canadian Dollar has been depreciating non-stop over the past six-weeks, and there is no need to look any further than what’s been happening with Bank of Canada rate hike expectations for the first half of 2018. Since mid-January, the odds of a May rate hike (there is no BOC meeting in June) have fallen from 80% down to 55% today. With uncertainty around the NAFTA renegotiations increasing thanks to US President Trump’s commentary about tariffs and a trade war, it seems high unlikely that the BOC will be revisiting the hawkish tone that carried the Loonie higher in Q4’17 and January 2018.
The European Central Bank’s March meeting will produce a new set of Staff Economic Projections. This is one of the four meetings during the year in which the central bank does so, raising the bar in terms of risk for the Euro.Given that the Euro trade-weighted exchange rate is up by +9.7% year-over-year, and inflation in the Eurozone continues to run well below the ECB’s medium-term target of +2%, it seems inevitable that there will be some degree of pushback from President Mario Draghi and the Governing Council over an early exit from their QE program. Indeed, even if policymakers continue to point to another small taper once the current pace runs its course in September 2018, they are likely to signal that there will be a ‘buffer window’ in which no more asset purchases are being untaken but rates will remain on hold. We’re not looking for the ECB to signal that they’ll be raising rates until at least Q3’19.
The monthly Bank of Japan Monetary Policy Statement is expected to see rates remain at -0.10% with the 10-year JGB yield target unchanged around 0%. Consumer price inflation in Japan rose by +1.4% in January 2018, leading BOJ Governor Kuroda to suggest last week that the easing program could end around the start of fiscal year 2019 (April next year). Now that a soft deadline for the end of their QE program has been established publicly, another simple reminder from BOJ officials that they’ll continue to ease aggressively this year may not be enough to stop Yen strength – it will take much more forceful commentary to halt the appreciation.
The main issue for the US Dollar when it comes to the February US Nonfarm Payrolls report is whether or not the US labor market will remain strong enough to justify a more aggressive pace of Fed tightening this year. While the Fed has suggested it will hike rates around three times in 2018, Fed Chair Powell has indicated that the FOMC’s economic projections are set to become more optimistic and markets begun to price in a fourth hike this year (hikes due in March, June, and November per Fed funds futures, with a 36% chance of a fourth hike in December). Heading into this Friday’s data release, current expectations for the data are modest, with the unemployment rate expected to drop to 4.0%, and the headline jobs figure to come in at +205K.
According to the Atlanta Fed Jobs Growth Calculator, the economy only needs +106K jobs growth per month over the next 12-months in order to sustain said unemployment rate at its current 4.1% level.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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