Market Briefing: Dollar Weakens Amid Mixed Month End Flows
Currency markets are ending February on a unstable footing, with most majors inching higher against the dollar, even as they fail to fully reverse the month’s losses. Equity futures are setting up for a stronger open, yields are flat, and implied volatility levels are trending down - but if traditional month-end patterns hold, we could see risk aversion build through the day, and the dollar could reverse higher.
European yields cranked higher this morning after France and Spain delivered stronger-than-expected inflation numbers. Headline consumer prices rose a record 7.2 percent year-over-year in France and 6.1 percent in Spain, raising the likelihood of an above-consensus euro area print on Thursday. The European Central Bank has committed to raising rates by half a percentage point at its next meeting in March, and odds are rising on a similarly-scaled move in May. In a Reuters interview yesterday, Philip Lane said “We’re all signed up to the criterion that sufficient progress in underlying inflation is important,” before bringing the hiking cycle to a halt, and warned it would be “quite a long-lasting period, a fair number of quarters” before rate cuts began.
Statistics Canada is expected to say the economy flatlined in December, expanding at a 1.6 percent seasonally adjusted annual pace in the last three months of 2022, down from 2.9 percent in the prior quarter. We think there’s some potential for an upside surprise - more recent data suggests momentum remained strong into January - but the impact on the Canadian dollar should be relatively muted. The Bank of Canada has clearly telegraphed a pause at next week’s meeting, and the threshold to further tightening remains high. The loonie has lost roughly -0.15 percent against the greenback this year on worsening rate differentials - but that makes it the best-performing G10 currency in relative terms.
The US calendar remains remarkably quiet. Forecasts suggest the Conference Board's consumer confidence index will rise to 108.5 in February from 107.1 in the prior month, and new Chicago Fed President Austan Goolsbee is scheduled to speak at Ivy Tech Community College this afternoon. We don’t know what his topic will be (we searched the internet to no avail), but given that he is reportedly under consideration to replace Lael Brainard as vice chair of the Board of Governors, markets will monitor closely for any monetary policy-related comments.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
CAD Gross Domestic Product, December
USD Advance Goods Trade Balance, January
USD Conference Board Consumer Confidence, February
AUD Gross Domestic Product, Q4
USD ISM Manufacturing, February
USD Department of Energy Weekly Inventories
BRL Gross Domestic Product, Q4
USD Initial Jobless Claims, Weekly
USD Baker Hughes Weekly Rig Count