USD

Risk assets finished the week on a soft footing, driven by stronger US data of late, with markets still smarting after those bumper January payroll gains of over 500k in the previous week, placing serious question marks around whether the Fed will/can/hope to be in a position to pause US rate hikes as soon as had been previously earmarked. With a fairly light data agenda not helping matters, markets had to live off scraps for the most part, with Friday’s stronger than expected Michigan Consumer Sentiment rising to 66.4 from 64.9 previously and beyond expectations of 65 as the index reached a 13-month high. However, the data also reflected rising consumer inflation expectations, something which will have been noted by the Fed. The dollar has therefore continued its recent rebound, with the dollar index DXY rallying beyond 103.00 by the close. Looking ahead, this week’s key US inflation and Retail Sales data are likely to set the trend for the greenback, with the former expected to continue to soften despite recently trending higher energy costs.

 

EUR

Having rallied to over 1.1000 a little more than a week ago, EUR/USD has fallen in fairly dramatic form and closed the week below 1.0700 for the first time since the beginning of January. Whilst markets had been previously buoyed by ongoing hawkish remarks on prospective rate hikes from the ECB, the recent toning down of language suggests a more cautious approach after this month’s meeting. Aside from that stronger USD (see USD), Euro area economic data of late has also contributed to the rapid fall from grace. Looking ahead, we suspect that tomorrow’s regional growth figures will help to drive short-term sentiment.

 

GBP

You know that things must be getting bad when you find markets celebrating zero growth, but in the case of the UK, the weak outlook has fuelled such a negative backdrop, not helped by the likes of the IMF, who suspect that UK growth will underperform just about every major economy over the year. Despite this, sometimes it is better to have such a low hurdle to have to jump over, which could ultimately help to underpin the pound if incoming economic data beats expectations, even if only at the margin. GBP/USD finished the week back over 1.2000, but with both US and UK inflation due for release over the next few days, we would expect heightened volatility for the pound over the week.

 

JPY

USD/JPY remains highly volatile as markets try to establish whether the Japanese government’s nomination of BoJ governor Kuroda’s replacement in Kazuo Ueda is ultimately likely to lead to a faster exit from yield curve control (YCC), or not. Whilst the initial headlines saw USD/JPY break back below 130.00 for a short spell, a later announcement from Ueda suggesting that the BoJ will be in no hurry to exit YCC, instigated a fairly rapid reversal back over 131.00 at the end of last week. We’ll be watching the yield on the 10-year JGB closely, which is currently capped by the BoJ at 0.5%, but has been under intense pressure from markets of late, who have been selling Japanese government bonds (pushing the yield higher) in anticipation of the BoJ raising interest rates in response to surging Japanese inflation. This process may be expedited on the arrival of the new BoJ governor.

 

CAD

The recent announcement from the BoC that they will be pausing their cycle of rate hikes came in to question at the end of last week after the latest (January) employment report highlighted a robust labor market. With another 115k headline payroll gains throughout January and overall unemployment remaining at a respectable 5%, markets were left pondering whether the BoC may be forced to backtrack. USD/CAD, therefore, bucked the trend of a surging greenback, with the pair slipping to close the week below 1.3350, as the Loonie gained across the board. 

 

MXN

A surprise 0.5% rate hike from Banxico, moving Mexican interest rates to a cycle high of 11% in the process, wrongfooted markets at the end of the week, who had been expecting a 0.25% increase from the central bank. The move came in response to surging Mexican inflation, which recently reached 7.91% (YoY), and helped to ensure that USD/MXN slipped back to below 18.7, and is close to attempting a break of the cycle low at 18.5.

 

BRL

USD/BRL finished the week back above 5.22, with the Real struggling after recent comments from Brazil’s president Lula Da Silva have left many questioning the ongoing autonomy of the Brazilian central bank at a time when the government is increasing fiscal spending. Lula confirmed that, at 13.75%, he feels that interest rates are too high, and he called on companies to complain about excessive financing costs.