The United States Dollar is kicking off this week in very muted territory ahead of the beginning of this month’s central bank cycle.
Overview
Kicking off with the Bank of Japan tomorrow and followed by the Bank of Canada and the European Central Bank later this week, no major policy changes are expected this time around but markets will undoubtedly be looking for any clues as to if and when rate cuts will emerge. The Fed and Bank of England meet next week, so volatility promises to swing higher through the remainder of this month.
While most global equities are pushing a bit higher this morning and the S&P 500 closed at a record high Friday, Chinese equities are once again tamping down global sentiment as the rout in Hong Kong listings grew to a stunning 36% discount compared with their mainland peers this morning. This is the largest differential in the two in fifteen years, and is a clear sign that pessimism from investors continues to grow. Deflationary pressures and a prolonged real estate sector slump are keeping sentiment surrounding the world’s second-largest economy quite depressed and these factors are, in turn, boosting USD a bit while emerging markets swing lower.
Though we are entering the blackout period before next week’s Federal Reserve meeting and policy decision, there remains a hefty amount of US data to come before. US GDP for Q4 comes Thursday morning, and is likely to once again show a resilient economy. Due Friday is the Fed’s preferred inflation gauge of PCE, with expectations of posting a 2.6% rate of annual inflation. As it stands now, markets have edged down their expectations for just how much the Fed will cut interest rates this year, eyeing just north of 5 25 basis point cuts compared with seeing six such cuts last week. All eyes are, once again, on central banks for the remainder of this month.
What to Watch Today…
EUR ⇓
The single currency is grinding slightly lower against USD today, ahead of Eurozone flash PMIs Wednesday and the European Central Bank’s meeting Thursday. As traditional logic goes, the Eurozone’s slew of weaker economic data from the last month gives little indication that the ECB can afford to keep interest rates as high as they are for a prolonged period of time, but Christine Lagarde has pushed back on any chatter of a cut in rates at Thursday’s meeting. Future guidance will be the primary influence on EUR’s direction through March.
JPY ⇑
Japanese Yen, ahead of the Bank of Japan’s meeting tomorrow morning, is gaining some ground and regaining a small amount of last week’s losses to the tune of a third of a percent. It’s all but guaranteed that the Bank of Japan will hold off from changing its negative interest rate policy, but currency officials did once again begin soft verbal warnings that they are watching moves from the Yen with “high urgency.” After a major earthquake on Jan 1 and soft data readings, though, it seems JPY will be left adrift by the central bank for now.
