Overnight, the US dollar outperformed most of its major counterparts following a barrage of hawkish remarks from FOMC officials, as well as comments on infrastructure spending by President Trump before Congress. The dollar rally was triggered by New York Fed President Dudley, who indicated that the case for a rate hike has become "a lot more compelling". Considering that Dudley usually maintains a neutral tone with regards to policy, these hawkish hints probably came as a surprise to many market participants, and revived some hopes with regards to a March hike. The chorus of optimistic FOMC comments continued with St. Louis Fed President Bullard and San Francisco Fed President Williams, both of which indicated that a near-term rate hike is a considerable possibility.
While investors were still digesting these remarks, President Trump stepped up to the rostrum to deliver his first address to Congress. Although the President did not offer much detail on tax reform, he did provide some specifics on infrastructure spending. He said that he will ask Congress to approve legislation that produces USD 1 trillion worth of investment in infrastructure. These comments added extra fuel to the USD rally ignited by Fed policymakers. USD/JPY surged after it hit support near the key obstacle zone of 111.60 and subsequently, it crushed three resistance (now turned into support) barriers in a row. At the time of writing, the rate looks to be headed towards the 113.80 (R1) resistance line, where a decisive break is possible to open the way for the crossroad of the 114.40 (R2) zone and the downside resistance line taken from the peak of the 19th of January. Nevertheless, although the pair may continue trading north for a while, we maintain the view that the short-term path remains sideways. The rate has been oscillating between 111.60 and 115.50 since the 11th of January.
As for our view with regards to the next rate increase, we stick to our guns that June is a much more likely candidate than March. Even though the probability for a March rate hike rose to 36% according to the Fed funds futures, we insist that this percentage is somewhat optimistic for a variety of reasons. First, the rotation of voting rights has turned the FOMC more dovish this year, something that was confirmed by the minutes of the latest policy meeting, which revealed a cautious stance by the Committee overall. Second, even after Trump’s overnight address, uncertainty around fiscal policy has not dissipated given that there is still a lot to be cleared up, especially with regards to spending and taxes. Finally, economic data do not call for an immediate hike yet, in our opinion. In order for us to reevaluate this view, we would need three things to happen in the next days: January’s core PCE price index to accelerate today, Fed Chair Yellen to echo similar remarks with Dudley in her speech on Friday, and February’s average weekly earnings, due next week, to accelerate notably.
BoC to take the sidelines amid improving data
Today, the highlight will be the Bank of Canada rate decision. The forecast is for the Bank to remain on hold. At its latest gathering, the BoC maintained a neutral bias with regards to policy in the meeting statement. However, Governor Poloz was quick to backpedal on that stance in the press conference following the decision. He said another rate cut remains on the table should downside risks materialize, leading investors to price in a higher probability for further easing. Since that meeting, economic data and developments have been encouraging, on balance. The labor market tightened notably in January and GDP growth rebounded in November, on a monthly basis. What’s more, oil prices have remained elevated in the aftermath of the OPEC consensus, while inflation data for February came in on a solid footing, with both the headline and the core rates rising. Perhaps something worrisome for the Bank is that its signals for further easing did not manage to materially weaken the CAD, which has remained strong against most of its major counterparts. Bear in mind that when they last met, BoC officials expressed their discontent about the appreciation of the currency following the US election. Taking all these into account, we share the view that the Bank is likely to remain sidelined. In such a case, market focus will quickly turn to the statement accompanying the decision, as there is no press conference. Given the progress in economic data, we expect the tone of the statement to remain neutral, something that could prove positive for CAD. However, there is the possibility for another warning about the strength of the Loonie, considering that the currency has traded sideways against most of its major peers since then. Such a warning could offset some of the potential positive reaction in CAD.
USD/CAD jumped overnight following Fed officials’ and Trump’s remarks and is currently headed toward the 1.3340 (R1) zone. We believe that the pair is possible to continue trading higher in the days to come, but a relatively optimistic statement from the BoC today could be the catalyst for a corrective setback. A dip back below 1.3300 (S1) is possible to confirm the case for such a retreat and perhaps aim for the 1.3220 (S2) support zone, marked by the peaks of the 7th and 22nd of February.
As for the rest of today’s highlights
During the European day, we get the final manufacturing PMIs for February from several European nations and the Eurozone as a whole. From Germany, we also get the preliminary CPI print for February. The forecast is for the rate to have risen above 2%, which could raise speculation that the Eurozone’s overall CPI, due to be released tomorrow, may follow suit and accelerate further. Something like that could support the euro.
From the UK, we get the manufacturing PMI for February. Expectations are for the index to have ticked down, but to have remained elevated well-above the 50 mark separating expansion from contraction. Although the reaction in GBP may be somewhat negative, we doubt that such a print will be particularly worrisome for BoE policymakers.
From the US, we get a plethora of economic data. Let’s kick off with personal income and spending data for January. The forecast is for income to have risen at the same pace as previously, while spending is expected to have slowed, but to have still grown at a healthy rate. We also get the ISM manufacturing PMI for February and expectations are for the index to have held steady. Finally, we get the core PCE price index for January, though no forecast is available. Given that this is the Fed’s favorite inflation measure, and that this rate has been range-bound since February 2016, we expect it to attract a lot of attention as investors try to gauge the timing of the next rate hike. A potential increase in this rate could amplify further market expectations with regards to a March hike, as it could confirm that underlying inflationary pressures have begun to accelerate, something already indicated by the accelerating core CPI for the same month.
From Canada, we get the Markit manufacturing PMI for February, though this is likely to be overshadowed by the BoC meeting.
We have only one speaker scheduled for today: Dallas Fed President Robert Kaplan.
