USD continues to correct lower giving back initial post-CPI gains

G10 FX: USD trading on weaker footing ahead of FOMC minutes

The US dollar has continued to correct modestly lower overnight resulting the dollar index testing support from the bottom of the recent narrow trading range between 104.00 and 105.00 after it hit a low yesterday of 103.80. The best performing G10 currencies overnight have again been the commodity-related currencies of the AUD and NZD that are benefitting from further policy stimulus from China. The PBoC lowered the five-year loan prime rate yesterday as part of their efforts to stabilize the domestic equity market and support housing sales. China’s equity market has continued its recent advance overnight with the Shanghai composite equity index briefly reversing all of its year to date losses. The paring back of China-related investor pessimism is putting a dampener on the US dollar’s upward momentum. The US dollar has failed to extend its advance after the release last week of the stronger than expected US CPI report for January. The main focus today will turn back to the outlook for Fed policy when the minutes from the January FOMC meeting are released. We expect the minutes to show that FOMC participants are mostly united in the view that they can take their time before cutting rates. At the January FOMC meeting, the Fed signalled clearly that they are unlikely to raise rates as soon as at the next meeting in March which is even more unlikely now after the release of the blow out nonfarm payrolls report for January and stronger CPI and PPI reports for January. The minutes could also provide further insight into any preliminary discussions over the Fed’s views on slowing  down the pace of quantitative tightening. However, Fed Chair Powell did indicate in the January press conference that the FOMC will hold “in-depth” talks on the balance sheet at the next meeting in March. In light of recent stronger US economic data releases, the US rate market has pushed back the expected timing of the first Fed rate cut to June. We are not expecting the minutes from the January FOMC meeting to significantly alter those expectations today although an earlier rate cut in May is unlikely to be ruled out.        

The other notable development yesterday was in Europe. The ECB revealed that the annual growth rate of negotiated wages slowed to an annual rate of 4.5% in Q4 down from a record high of 4.7% in Q3. The ECB will want to see further evidence that wage growth has continued to slow at the start of this year before deciding to cut rates.  President Lagarde noted recently that wage growth is “an increasingly important driver of inflation dynamics in the coming quarters” while cautioning against “hasty decision” on easing monetary policy. The euro-zone rate market has become less confident that the ECB will deliver the first rate cut as soon as in April which is currently priced at around a 50:50 probability. The ECB staff’s inflation forecasts would need to be revised significantly lower in March to increase the likelihood of a April cut rather than in June when the ECB will have more info on wage growth in Q1. EUR/USD is currently stabilizing back within the middle of last year’s trading range between 1.0500 and 1.1000.                  

EUR/USD VS. SHORT-TERM YIELD SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

CAD: Slowing inflation brings forward BoC rate cut expectations

The Canadian dollar has continued to trade at weaker levels after the release yesterday of the softer than expected Canadian CPI report for January. It has resulted in USD/CAD rising back above the 1.3500-level. It marks a reversal in fortunes for the Canadian dollar which had been one of the better performing G10 currencies at the start of this year alongside the US dollar. The Canadian dollar had been benefitting from positive spill-overs from the ongoing resilience of the US economy, and pick-up in core inflation measures in Canada toward the end of last year.         

The release of Canadian CPI report for January has provided a setback for the Canadian dollar. The report revealed that headline inflation started this year on a weaker footing with the annual rate slowing by 0.5 point to 2.9%. The monthly change headline inflation January was flat and eve fell by -0.1%M/M in seasonally adjusted terms. The BoC will be reassured that core inflation measures dropped back as well in January. The trim core CPI measure by 0.3 point to 3.4% and median core CPI measure by 0.2 point to 3.3%. While the slowdown in core inflation measures is a welcome development, they still remain uncomfortably high for the BoC who would like to see three and six month annualized measures falling back below 3.0%.             

As a result, we still expect the BoC to remain cautious over signalling imminent rate cuts at their next policy meeting on 6^th March. However, the softer CPI data has encouraged market participants to more fully price in the BoC beginning to cut rates by the June policy meeting. There is even just over a 50:50 probability priced in for a rate cut as soon as in April. With growth in Canada running below potential and inflation slowing, the rationale for the BoC to make rates less restrictive is continuing to fall into place. After stripping out mortgage interest rate costs that have been lifted by past BoC rate hikes, inflation in Canada has already fallen back to their 2.0% target. In light of these developments we see room for the Canadian rate market to price in more than 75bps of rate cuts by the end of this year. The developments have increased the likelihood that USD/CAD will continue to trade above support from the 200-day average which comes in at around 1.3480 in the near-term.

SLOWING INFLATION PROVIDING REASSURANCE FOR BOC

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	10:00	German Buba President Nagel Speaks	--	--	--	!!
UK	11:00	CBI Industrial Trends Orders	Feb	-27	-30	!!
US	13:00	FOMC Member Bostic Speaks	--	--	--	!!
CA	13:30	BoC Deputy Governor Gravelle Speaks	--	--	--	!
UK	14:00	BoE MPC Member Dhingra Speaks	--	--	--	!
EC	15:00	Consumer Confidence	Feb	-16.0	-16.1	!
US	18:00	FOMC Member Bowman Speaks	--	--	--	!!
US	19:00	FOMC Meeting Minutes	--	--	--	!!!

Source: Bloomberg