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Dollar catches footing as inflation pressures rates outlook

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The dollar steadied on Monday after its steepest weekly loss in more than a month, as traders weigh the effect of inflation on the relative pace of looming rate hikes – with a wary eye on U.S. growth data and a European Central Bank meeting.

The greenback had softened, especially against the yen, after Federal Reserve Chair Jerome Powell said on Friday it was time to start cutting back asset purchases, though not yet time to begin raising interest rates.

His remarks came as investors have priced in Fed rate hikes starting in the second half of next year and yet have begun to trim long dollar positions in anticipation that other central banks could get moving even sooner.

On Monday, the dollar was firm at $1.1643 per euro and found a footing on the yen at 113.54 after Friday’s slide. The Australian and New Zealand dollars were held below the multi-month peaks they had scaled during last week. [AUD/]

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The Antipodeans, along with sterling, had bounded ahead this month as traders scrambled to price in higher rates while inflation runs hot, with markets now eyeing a near 60% chance of a Bank of England hike next week.

Sterling was up 0.1% at $1.3772, but analysts were cautious about further gains especially as the Fed edges closer to tapering and policy tightening. The Aussie was steady at $0.7473 and the kiwi at $0.7157.

“Dollar risks remain skewed to the upside,” said Kim Mundy, a currency analyst at the Commonwealth Bank of Australia in Sydney.

“(Fed) members are slowly conceding that inflation risks are skewed to the upside (and) the upshot is that interest rate markets can continue to price a more aggressive Fed Funds rate hike cycle which can support the dollar.”

This week, Australian inflation data due on Wednesday is likely to set the tone for the next stage in a tussle between traders and a resolutely dovish central bank.

On Thursday, U.S. growth data is expected to show a slowdown in growth as consumer confidence has faltered, but a surprise on either side might have consequences for the interest rate outlook.

Also on Thursday the Bank of Japan and the European Central Bank meet. Neither are expected to adjust policy, but in Europe market gauges of projected inflation are at odds with the bank’s guidance.

In the background, traders remain nervous about trouble brewing at indebted developer China Evergrande Group. It surprised investors by averting default with a last-minute coupon payment last week, but other pressing debts loom.

China’s yuan held just shy of a five-month peak in offshore trade at 6.3804 per dollar. Cryptocurrencies were steady below the heights reached last week, with bitcoin up 2% at $62,000.

In emerging markets the beaten-down Turkish lira was braced for selling as state banks are expected to follow a surprise rate cut from the central bank.

========================================================

Currency bid prices at 0110 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.1645 $1.1646 -0.01% -4.69% +1.1649 +1.1626

 

Dollar/Yen

113.7350 113.4900 +0.18% +10.07% +113.7400 +113.5750

 

Euro/Yen

132.45 132.17 +0.21% +4.35% +132.4500 +132.1200

 

Dollar/Swiss

0.9163 0.9162 +0.00% +3.56% +0.9169 +0.9157

 

Sterling/Dollar

1.3771 1.3756 +0.13% +0.81% +1.3775 +1.3752

 

Dollar/Canadian

1.2362 1.2368 -0.03% -2.90% +1.2379 +1.2358

 

Aussie/Dollar

0.7478 0.7470 +0.11% -2.79% +0.7478 +0.7465

 

NZ

Dollar/Dollar 0.7161 0.7150 +0.15% -0.29% +0.7162 +0.7148

 

 

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ

 

(Reporting by Tom Westbrook; Editing by Sam Holmes)

Economy

Bank of Canada walking a ‘tightrope’ as analysts forecast inflation jump in February

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Economists expect inflation reaccelerated to 3.1% in February

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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

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Article contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

‘Can’t afford missteps’: Desjardins Financial

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.

“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.

‘Inflict too much damage’: National Bank

The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.

They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.

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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.

Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.

The trio expect very tepid growth for 2024 of 0.3 per cent.

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Rising gas prices: RBC Economics

Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.

Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).

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China Growth Beats Estimates, Adding Signs Economy Gained Traction With Stimulus

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China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.

Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.

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China’s retail and industrial data lifts economy, but real estate drags

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Image for article titled China’s new retail and industrial data beat expectations — but signs still point to trouble ahead

 

 

Photo: Florence Lo (Reuters)

 

 

Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.

Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.

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Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.

“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.

China’s shaky domestic demand

Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.

Total outstanding yuan loans grew by 9.7% last month, a record low in data going back to 2003, according to Bloomberg. The sluggish borrowing demand comes even as the Chinese central bank made a surprise cut in the amount of cash that banks must hold in reserve, suggesting the stimulus measure has had little impact. And Beijing’s exhortations for unleashing “new quality productivity” (also translated as “new quality productive forces”) remains more rhetorical than substantive, particularly absent deeper structural reforms to the country’s economy.

With shaky demand at home, China’s bid to hit a GDP growth target of 5% this year will likely mean leaning heavily on its export machine. But that gambit will also face hurdles as governments, including the EU and Brazil, launch probes into China’s allegedly unfair trade practices. Separately, the U.S. is considering whether to investigate Chinese shipbuilding following a petition from major American labor unions.

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