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FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

Christopher Vecchio, CFA, Senior Strategist
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FX Week Ahead Overview:

  • Bond markets will be on edge all week, with several measures of inflation due from around the globe (Mexico, China, US, Australia, Brazil, Germany, and India).
  • Meanwhile, the Bank of Canada and European Central Bank will weigh in on the current state of affairs in financial markets at their rate decisions on Wednesday and Thursday, respectively.
  • Changes in retail trader positioning suggest that most USD-pairs could break in favor of more greenback strength.
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03/10 WEDNESDAY | 13:30 GMT | USD Inflation Rate (CPI) (FEB)

The February US inflation (CPI) report will be released this coming Wednesday as market measures of inflation have jumped higher since the start of the year. At the close of this week, the 5y5y inflation swap forward is at 2.328%, down from its yearly high of 2.481% set on February 8, and the 5y5y breakeven is 2.065%, off of its yearly high of 2.215% set as well on February 8.

Looking to the data due, according to a Bloomberg News survey, stabilization in price pressures is anticipated, if not showing some upside pressure starting to build. The headline inflation rate due in unchanged at +1.4% (y/y), while core inflation is due in at +1.7% from +1.4% (y/y). Over the coming months, we’ll learn how resilient of a position the Fed has staked out, as the likely impact of a base effect could drive headline inflation higher through +2% over the coming months.

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IG Client Sentiment Index: USD/JPY Rate Forecast (March 5, 2021) (Chart 1)

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

USD/JPY: Retail trader data shows 41.15% of traders are net-long with the ratio of traders short to long at 1.43 to 1. The number of traders net-long is 9.75% lower than yesterday and 16.97% lower from last week, while the number of traders net-short is 1.89% higher than yesterday and 42.55% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.

03/10 WEDNESDAY | 15:00 GMT | CAD Bank of Canada Rate Decision

The BOC meets for the second time this year this coming Wednesday, and in the interim period, the Canadian Dollar has been mostly rangebound. At the January meeting, BOC Governor Tiff Macklem noted that “we’ve seen this broad-based US dollar deprecation that doesn’t reflect some positive development in Canada that the exchange rate is absorbing…the exchange rate is starting to create a material headwind for the Canadian economy.”

Rising bond yields may be changing the equation for the BOC, but USD/CAD rates may be beyond the BOC’s influence, as Governor Macklem conceded in January, when “in a situation where our Canada-U.S. exchange rate is moving largely because of made-in-U.S. developments as opposed to made-in-Canada developments.”

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Bank of Canada Interest Rate Expectations (MARCH 5, 2021) (Table 1)

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

Interest rate expectations have started to move around more materially, but that’s largely due to the volatility seen in rates markets generally. Looking through the noise for the signal, it’s worth noting that the trend has only shifted marginally over the past two weeks: in late-February, there was a 16% chance of a 25-bps rate cut by the BOC by December 2021. Now, Canada overnight index swaps (OIS) are pricing in a 23% chance of a 25-bps rate hike through the end of the year.

03/11 THURSDAY |12:45 GMT | EUR European Central Bank Rate Decision

In recent weeks, the ECB acknowledged that "if favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full.” A few weeks later after the global bond yield spike, it seems that the ECB may rethink their plans to provide less stimulus as previously anticipated.

For now, however, like the BOE and the Federal Reserve, there has been a clear drumbeat of ‘higher yields is a positive development!’ Or, in ECB Governing Council member Klaas Knot’s exact words, “what the market is actually doing is pricing that optimism” about a recovery in the second half of 2021.

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EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (March 4, 2021) (TABLE 2)

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

According to Eurozone overnight index swaps, the jump in global bond yields has spilled over to ECB interest rate expectations. In mid-January, when we last looked at ECB interest rate expectations, there was a 54% chance of a 10-bps rate cut by December 2021; that probability has dropped to 17%. This is a deep retracement from where we were at the end of 2020, rates markets were pricing in a 10-bps rate cut in July 2021. It very much seems like the prospect of further ECB stimulus can’t be ruled out if yields keep spiking (as the ECB needs to do the dance of chasing inflation higher), but those stimulus efforts may not be coming vis-à-vis the interest rate channel (e.g. increasing the net purchase horizon of the PEPP).

03/12 FRIDAY | 07:00 GMT | GBP Growth Rate (JAN)

While the UK is among the best in the world at vaccinating its citizens, such a designation became a necessity after the outbreak of the B1.1.7 mutation of COVID-19. The emergence of the mutation lead to lockdowns at the end of 2020 which rolled into 2021, keeping the economy on simmer rather than back on the path towards a rolling boil.

According to a Bloomberg News survey, the three-month growth rate through January 2021 is due in at -2.4% from +1% in December 2020. Meanwhile, the year-over-year reading is due in at -10.9% in January from -6.5% in December. Like last month, any issues seen in the January 2021 UK GDP data may be overlooked as “more near-term information paints a brighter future.”

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IG Client Sentiment Index: GBP/USD Rate Forecast (March 5, 2021) (Chart 2)

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

GBP/USD: Retail trader data shows 54.12% of traders are net-long with the ratio of traders long to short at 1.18 to 1. The number of traders net-long is 1.05% higher than yesterday and 10.18% higher from last week, while the number of traders net-short is 12.90% lower than yesterday and 12.67% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarian trading bias.

03/12 FRIDAY | 13:30 GMT | CAD Employment Change & Unemployment Rate (FEB)

After a harrowing reading of -212.8K in January, the Canadian labor market is looking for a relatively modest expansion in February. Bloomberg News consensus forecasts call for the February Canada jobs report to show that the economy added +52.5K jobs. The unemployment rate is expected to fall back to 9.3% from 9.4%, after sharply moving off of the November 2020 low of 8.5%. A better reading of the Canadian labor report alongside further strength in energy prices may allow for the Loonie to regain its footing by the end of the week.

IG Client Sentiment Index: USD/CAD Rate Forecast (March 5, 2021) (Chart 3)

FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

USD/CAD: Retail trader data shows 70.52% of traders are net-long with the ratio of traders long to short at 2.39 to 1. The number of traders net-long is 4.49% higher than yesterday and 20.78% higher from last week, while the number of traders net-short is 9.86% lower than yesterday and 4.01% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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