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Foregone Conclusion?

Over the last couple of weeks, a series of Federal Reserve speakers have talked up the likelihood of a Fed rate hike here in March. Heading into Friday’s USA employment report, the Fed Funds implied probability indicated a 100% chance – yes one hundred percent! – of a Fed rate hike at next week’s FOMC meeting. The report itself (nonfarm payrolls +235k vs. +200k expected, 4.7% unemployment in line with expectations, and a slightly higher labor participation rate) did nothing to change that expectation, as the chart below indicates.

The dollar’s reaction has been generally mixed – and of course domestic interest rates don’t exist in a vacuum. There are other significant factors influencing currency markets, more on that later. 2017 has been a tale of two very different stories for the dollar. In January, the greenback fell against every one of its G10 counterparts. Since Feb 1, however, that trend completely reversed

As mentioned above, there are plenty of other factors driving currency markets. Namely, the ECB met Thursday and left rates unchanged, but ECB Chair Draghi sounded much more balanced from a risk perspective (as opposed to recent deflationary concerns) than he has in quite some time. Could this mean that the era of negative interest rates in the Eurozone could soon be ending? It may be a bit premature to speculate as such, but it’s undeniable that Draghi’s comments gave euro bulls a bit of long-awaited positivism on which to chew, and the euro bounced over a cent on the comments. That bounce has extended despite the strong USA employment report, which tells me 1) the strong USA data were widely anticipated and perhaps positions taken into the number (which are now reversing) and 2) the euro could be putting in a base around these levels.

Elsewhere, with oil dipping below $50 per barrel yesterday, the CAD continues to show independent weakness. In fact, the CAD and the NOK, two currencies historically positively correlated to oil, are two of the three weakest currencies among the G10 since mid-February. That said, today’s stronger-than-expected employment report north of the border has given the loonie a respite; USD/CAD is lower (stronger CAD) for only the second time in the last ten trading sessions.

The ongoing and surprising recovery of the Mexican Peso remains noteworthy. Mexican Central Bank action to buy MXN/sell USD continues to support the peso, which now comfortably sits below 20.00 after spiking above 22.00 post-election. It is of further note that among the primary Latin American currencies, the MXN is the only one stronger against the dollar since Feb 15.

Japanese year-end is March 31, and conventional wisdom often suggests that this is a period of JPY strength, as Japanese exporters sell foreign currencies and buy yen. As with all things currency and markets related, however, there are no sure bets. In fact, with the exception of last year, the JPY has actually weakened every March since 2009! Thus far in 2017, USD/JPY is up about 1%.

As we head into this week, all eyes will be on the FOMC meeting March 15. Well…most eyes. March Madness and St. Patrick’s Day will surely draw some attention as well.

Good luck and of course please let me know if I can do anything FX related for you.

Cheers –

Drew

Compliments by Bannockburn Global Forex – a member of the EACCNY