The Week Ahead: Jobs and Fedspeak to Guide Dollar

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Comments from members of the U.S. Federal Reserve have put a rate hike in March back on the table. Lack of details on the Trump administration pro-growth policies had reduced the probability of the central bank raising interest rates but the words from Chair Yellen and other influential members now have the market pricing in an 80 percent probability of a rate increase on March 15.

Chair Yellen has mentioned before that there are risks in waiting too long before raising rates and on Friday she said: “We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect”. The biggest data release between then and now if the Jobs report on Friday.

The U.S. non farm payrolls (NFP) will be published on Friday, March 10 at 8:30 am EST (1:30 pm GMT). The forecast calls for a gain of 180,000 jobs and a 0.3 percent with in hourly wages. Job gains above 150,000 have been consistent since November of 2015, but wage growth has been disappointing and at this point will probably be more heavily scrutinized that the headline number. The Trump administration pro-growth policies appear to be delayed, but as Treasury Secretary Mnuchin reassured markets they are coming, giving the Fed another reason to move forward with their tightening plans.
 

Fed comments shift the market perception
The EUR/USD lost 0.112 percent in the last five days. The single pair is trading at 1.0562 after comments from Fed members have shifted the market perception on the U.S. Federal Reserve’s next move. At the end of February the market had priced in less than 30 percent of a rate hike during the March 15 monetary policy meeting. FOMC Members such as Richmond Fed President Jeffrey Lacker pointed out that the market was underestimating the pace of Fed rate hikes. Fed Chair Janet Yellen also supported that line of thinking when she said it was unwise to wait too long before raising interest rates.

The market has now adjusted to the Fed hints as the CME FedWatch tool is showing a 81.9 percent probability of a rate hike in the next FOMC. Analysts are divided even as Chair Yellen has said that a rate hike would be appropriate in March.

Economic indicators were mixed in the U.S. with core durable goods underperforming at –0.2 percent. The second release of GDP data for the fourth quarter also disappointed with a 1.9 percent reading below the forecasted 2.1 percent. Consumer confidence, Manufacturing and non-manufacturing PMIs have exceeded expectations. Given Chair Yellen’s statement next week’s employment data will weigh heavily on the FOMC’s statement due on March 15.

Bank of Canada keep interest rates unchanged
The USD/CAD gained 2.416 percent in the last week. The currency is trading at 1.34 following the decision by the Bank of Canada (BoC) to keep the benchmark interest rate unchanged at 0.50 percent on Wednesday. Investors had expected the BoC would stand pat even as inflation metrics went up in January.

Canadian growth surprised on March 2, as the fourth quarter GDP came in at 2.6 percent on a forecast of 2.0 percent and the U.S growth in the same period at 1.9 percent. The positive indicator did not stop the USD on gaining versus the CAD. The words from Fed members pointing to a March rate hike had more weight in the end and the loonie traded above 1.34 before settling slight under that level ahead of the weekend.
 

Peso surges after NAFTA renegotiation
The USD/MXN lost 1.721 percent in the last five days. The currency pair is trading at 19.52 as the peso surged after the comments from newly appointed U.S. Commerce Secretary Wilbur Ross on a positive outcome for the Mexican currency if the country reaches a sensible agreement on a NAFTA renegotiation. The peso rallied after the news and a strong hint of a softening stance from the Trump administration on trade with its southern neighbor. Ross cited the fear of the negative effects of NAFTA as the main reason for the peso depreciation, but said, “if Mexicans make a very sensible trade agreement the peso will recover quite a lot”.

The Mexican currency was one of the biggest winners in February thanks to a proactive central bank program, a commitment by the Banxico governor to remain beyond his original resignation date (before joining the BIS) but a big factor has been the more diplomatic statements from the Trump cabinet.

But downside risks remains for the MXN, but for now some of the worst impacts of the anti-trade and immigration policies of the first days of the Trump administration have subsided.
 

Market events to watch this week:

Monday, March 6
10:30 pm AUD Cash Rate
10:30 pmAUD RBA Rate Statement

Tuesday, March 7
8:30am CAD Trade Balance
Tentative CNY Trade Balance

Wednesday, March 8
7:30am GBP Annual Budget Release
8:15am USD ADP Non-Farm Employment Change
10:30am USD Crude Oil Inventories
8:30pm CNY CPI y/y

Thursday, March 9
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Unemployment Claims

Friday, March 10
4:30am GBP Manufacturing Production m/m
8:30am CAD Employment Change
8:30am USD Non-Farm Employment Change

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar