The US dollar retreated Thursday after a week of gains as hawkish talk was brushed aside. The yen was the top performer while the US and Canadian dollars lagged. A new Premium trade will be issued ahead of the Asia Friday trade session. It will be the 3rd index trade.
Goldman Sachs grabbed headlines (but not markets) with a note on Thursday suggesting the FOMC could hike rates five times this year and FOMC speakers underscored the strong economy. But bonds weren't impressed and 10-year yields retreated back to 2.92%.
The market dabbled with the hawkish talk before having second thoughts. The yen led the way and USD/JPY dropped to 106.68 from 107.78. The move nearly erased two days of gains and underscored the downtrend in the pair and the struggles of the US dollar more broadly.
Struggling right alongside USD was CAD. Another round of NAFTA talks begins Feb 25 and the market is reluctant to buy the loonie until there is some sense of clarity on the trade deal. In addition, the economy continues to send mixed signals.
Canadian December retail sales dropped 0.8% compared to a flat reading expected. Ex autos was even worse at -1.8% compared to the +0.3% consensus. The loonie initially tumbled but got back on its feet.
Odds of a March BoC hike fell to 9% but the April meeting is at 49%. That's down from 54% before the data but it's still too high. The BOC wants a resolution on NAFTA and wants to see the effects of prior hikes before making another move. A key loonie factor will be inflation data on Friday. The CPI is forecast to rise just 1.5% y/y, down from 1.9% in December but the trend in core numbers will be key as well.
Before that – at 2350 GMT – Japan will also be looking at CPI numbers. Headline inflation is forecast to rise to 1.3% y/y from 1.0% but core is expected to rise just 0.3% y/y.
|Core Retail Sales (m/m)|
|-1.8%||0.1%||1.7%||Feb 22 13:30|
|FOMC's Dudley Speaks|
|Feb 23 15:15|
|FOMC's Mester Speaks|
|Feb 23 18:30|
|FOMC's Williams Speaks|
|Feb 23 20:40|
|0.4%||-0.4%||Feb 23 13:30|
|National Core CPI (y/y)|
|0.9%||0.8%||0.9%||Feb 22 23:30|
The FOMC Minutes led to a whipsaw in US dollar trading Wednesday and exposed a dilemma. The US dollar was the top performer once again while the Australian dollar lagged. China returns from holiday in the day ahead. 9 Premium trades are currently in progress, 2 of which in indices.
The FOMC Minutes didn't offer much in the way of surprises but offered plenty in the way of market moves. The US dollar fell 30-40 pips across the board on the headlines only to make a complete recovery 30 minutes later and finish at the highs.
In the lead-up to the release, there was fear about an especially hawkish set of minutes but that didn't materialize. Instead, there was the predictable optimism about growth along with hints at upside risks to inflation.
At first, it seemed fears in the market were soothed. The US dollar dropped and stock markets rallied. But bond traders pushed yields further in a sign of jitters about four rate hikes this year.
A short time late, stocks joined bonds lower and USD rallied. The looming level is 3% in the 10-year note. It rose 6 bps to 2.95% Wednesday – the highest since 2014. Along with the big figure, the 2014 high of 3.06% is a major level of resistance.
At this point, other markets are beginning to get worried about the reaction to higher borrowing costs. We get the sense that many are heading to the sidelines to see how it will shake out. Ultimately, 3% is just a number and it's not a magical line in the sand that's going to torpedo borrowers' finances so there might be a sigh of relief once it's breached. But until then, expect further jitters to continue.
Looking ahead, the Asia-Pacific economic calendar is light but it includes the return of China after a week of holidays. That's likely to add a bit of volatility and certainly some flows. Further down the agenda, the Fed's Quarles speaks at 0515 GMT along with French CPI, German IFO sentiment data, UK GDP and Canadian retail sales. All that should make for plenty of action.
|FOMC's Quarles Speaks|
|Feb 22 5:15|
|FOMC's Bostic Speaks|
|Feb 22 17:10|
|France Final CPI (m/m)|
|-0.1%||-0.1%||Feb 22 7:45|
|Second Estimate GDP (q/q)|
|0.5%||0.5%||Feb 22 9:30|
|Core Retail Sales (m/m)|
|0.1%||1.6%||Feb 22 13:30|