FX Update: Powell surprises hawkish, data still in driver’s seat.

Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: Fed Chair Powell jolts USD higher with promise to re-accelerate the pace of hikes if warranted. Bank of Canada will need to tread carefully to avoid further CAD weakness after its prior guidance to pause its tightening regime starting at today’s meeting.

Fed Chair Powell was surprisingly (to me) pointed in his remarks on the likelihood that the Fed funds rate would likely have to head higher than previously anticipated and by indicating a willingness to consider re-accelerating the pace of rate hikes if “the totality” of data warranted doing so. This gives a clear sense that the Fed doesn’t trust its own models of where things are headed and was unsettled by the January inflation data (particularly the PCE core) in particularly, as well as the strong jobs report and modern low record in the unemployment rate. With that in mind, it is clearly the data itself that is in the driver’s seat for cementing the ensuing jump and break higher in the US dollar and market reset to a higher Fed terminal rate yesterday. The 2-year US treasury yield benchmark rose to a new high since 2007 above 5.00% as the terminal Fed rate by September of this year was lifted as high as 5.65%. As noted in this morning’s Saxo Market Call podcast, the market still expects about 150 basis points of cutting by early 2025 from wherever the Fed peaks its tightening cycle, suggesting that the market remains convinced that either disinflation will quickly develop by late this year and/or that a recession at some point will have the Fed easing, if from a higher level.

First up, data-wise is minor stuff today including the woefully tardy JOLTS job opening survey for January. This survey has receive considerable attention, but other private-sector services (for example: ZipRecruiter and Indeed) release their data well ahead of the JOLTS and uniformly show a steady decline in job openings, even if they are still above where they were in February of 2020. The JOLTS survey does cast a wider net, in terms of number of firms surveyed. We also have the ADP employment change data today, which did little to prepare us last month for the +517k Nonfarm Payrolls print last month when the ADP only reported +106k. Thus, the combined Nonfarm Payrolls and Household survey (which has strengthened of late – it measures the percentage of those surveyed who say they are in work) will hold the key for supporting Powell’s message and increasing the risk of a 50 basis point hike from the FOMC on March 22 (currently about 41 basis points priced in), together with the February CPI data up next Tuesday, the 14^th.

Chart: USDCAD
USDCAD is quite typical of USD pairs here as the USD makes new highs for the year against CAD, but the pair did post higher levels back at the height of the USD bull run last fall. CAD has been relatively firm in the crosses, likely on the beta that the loonie often shows to the USD in the crosses. But the Bank of the Canada has been an early mover among G10 currencies on the dovish side in trying to pre-announce a pause in their rate hike cycle on some softer Canadian data. Despite the latest shift higher in Fed expectations, the market is expecting the BoC to make good on the guidance from the prior meeting and has priced essentially no tightening from the BoC for the next two meetings, with only slightly more than 25 bps of tightening price through late this year. We could see the market punishing CAD further here if the BoC maintains this dovish guidance, especially if risk sentiment and crude oil prices remain under anything like the pressure we saw them under yesterday. Governor Macklem would do well to roll out some more emphatically two-way guidance. As with the other small, open economies, the BoC chief is likely preoccupied with the rolling trainwreck for tight household budgets incoming as Canadian mortgage reset higher. A strong majority still take out “fixed” rate mortgages, but these roll every five years. The five-year ago 5-year rate for Canadian government bonds was around 2.00% vs. over 3.50% currently, a significant difference that only worsens from here, with the 2019 5-year yield dropping to 1.50%, and then 1.00% in 2020 and even below 0.50% for much of 2021. And there is still a large minority of mortgage holders that are on floating rate mortgages and already feeling an impact. In any case, watching the 1.3900+ highs of the cycle in USDCAD through next Tuesday’s CPI release.