Dollar Attempts Modest Recovery

• The solid US labor market and sticky underlying inflation argue for a cautious Fed.
• Canada has a new leader. Snap federal elections could come as soon as April 21.
• Norway February inflation overshot expectations raising odds the Norges Bank delays the start of easing. NOK outperforms.

US growth concerns and encouraging fiscal developments in Europe are ongoing drags for USD. However, USD is vulnerable to a modest relief rally and Treasuries can retrace recent gains. The solid US labor market and sticky underlying inflation suggest the Fed is unlikely to deliver on the 75bps of easing by year-end implied by interest rate futures.

US employers added 151k jobs to payrolls in February. The increase was only slightly below consensus of 160k and not too far from the average monthly gain of 168k over the previous twelve months. The unemployment rate rose 0.1pts to 4.1% but is still in a narrow 3.9% to 4.2% range of the past year. Labor force participation fell 0.2pts to 62.4% and likewise is within the range of values observed in the past year. The January JOLTS data Tuesday will offer additional insights on the balance of labor supply and demand.

Fed Chair Jay Powell stressed again Friday “we do not need to be in a hurry, and are well positioned to wait for greater clarity.” According to Powell, it is the net effect of the new Administration’s policy changes in trade, immigration, fiscal policy, and regulation “that will matter for the economy and for the path of monetary policy.” Powell added that “while there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high.”

Meanwhile, Fed Governor Adriana Kugler warned that “given the recent increase in inflation expectations and the key inflation categories that have not shown progress toward our 2 percent target, it could be appropriate to continue holding the policy rate at its current level for some time.”

Today, the data highlight is the February New York Fed survey of consumer expectations (3:00pm London). In January, the survey reinforced the case that progress on inflation is stalling well above 2%. Inflation expectations were unchanged at 3.0% at both the one- and three-year-ahead horizons, while median five-year-ahead inflation expectations rose by 0.3pts to 3.0%.

NORWAY

NOK is outperforming. Norway February inflation overshot expectations, raising the likelihood the Norges Bank delays the start of easing. Headline rose to a 12-month high at 3.6% y/y (consensus: 2.6%, Norges Bank Q1 forecast: 2.5%) vs. 2.3% in January while underlying CPI increased to a nine-month high at 3.4% y/y (consensus: 2.9%, Norges Bank Q1 forecast: 2.7%) vs. 2.9% in January. At its January meeting, the Norges Bank kept rates steady at 4.50% and reiterated that “the policy rate will most likely be reduced in March.” The swaps market trimmed odds of a 25bps cut at the March 27 meeting from 90% to 60%.

CANADA

USD/CAD is trading in a tight range around 1.4360. Former central banker Mark Carney won, with a massive 85.9% support, the ruling Liberal Party’s race to become the next prime minster. Carney will be sworn in as Canada’s new leader in the next few days and could call a snap election immediately after. This means an election could take place as soon as April 21. Carney could also wait until Parliament returns on March 24, where he’s expected to face a vote of no confidence that would trigger a snap election as early as May 5.

Recent polls have shown a resurgence in support for the center-left Liberals at the expense of the center-right Conservative Party and the left-wing New Democratic Party. Still, the Conservative Party have a 7 to 10pts lead in most polls.

CAD will take its cue from the Bank of Canada (BOC) policy decision Wednesday. Markets price-in 90% odds of a 25bps BOC policy rate cut to 2.75%. Analysts surveyed by Bloomberg are more split with 19 calling for a cut and 7 looking for no change. We had expected the BOC to pause easing in March because core inflation (average of trim and median CPI) is tracking above the BOC’s Q1 projection of 2.5%. However, Canada’s poor February labor market report and the drag to growth from tariffs uncertainty leave room for the BOC to deliver a rate cut this week which can further weigh on CAD.

Over the weekend, China imposed retaliatory tariffs on Canada. Effective March 20, there will be a 100% tariff on rapeseed oil, rapeseed meal and pea products, and a 25% levy on pork and some seafood imports from Canada.

JAPAN

USD/JPY is trading heavy under 148.000. Japan underlying wage pressures gained traction in January and could force the Bank of Japan to normalize rates by more than is currently priced-in. The policy-relevant scheduled pay growth for full-time workers rose 3% y/y (consensus: 2.9%) vs. 2.8% in December, matching the July 2024 series high of 3%.

Of note, Japan’s biggest trade union group Rengo is demanding larger wage hikes. Members are asking an average wage increase of 6.09% this year, up from last year’s 5.85%, and seeking more than 6% for the first time in more than three decades. Faster wage growth is an upside risk to Japan’s inflation outlook. The swaps market is pricing in 75bps of tightening over the next two years that would see the policy rate peak near 1.25%.

CHINA

USD/CNH rallied overnight by roughly 0.45% towards 7.2700. China’s economy is struggling to escape a deflationary spiral. In February, headline CPI fell more than expected to -0.7% y/y (consensus: -0.4%) vs. 0.5% in January. This was the first drop in 13 months and largely reflects a high base from a year earlier. Core CPI declined for the first time since 2021 to -0.1% y/y vs. 0.6% in January as services prices fell the most in four years. Finally, PPI contraction extended into a 29th month falling by -2.2% y/y vs. -2.3% in January.

To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption. China's consumption-to-GDP ratio is very low at round 40%, due to high household savings, low household income levels, and high levels of household debt.