This week’s dollar rally could start early

The dollar is poised to get stronger this week.  The February Employment Report will be released this Friday at 830 EST.  The market is expecting the economy to have created 240K new jobs and pushed the unemployment rate down to 5.6 percent in January from 5.7 percent in December.

The Fed’s target range for unemployment is 5.2 to 5.6 percent.  Therefore, if the unemployment rate comes in at 5.6 percent on Friday, then the dollar could rally as bond traders price in a rate hike by the Fed and a rising inflation rate later in the year.

Until then, the market will be going over today’s ISM Manufacturing Purchasing Managers Index (PMI) and Personal Spending Reports along with Wednesday’s ISM Non-Manufacturing PMI. If these reports continue to profile a strong US economy amid slow growth overseas, then this week’s anticipated dollar rally could begin early.

More and cheaper euros to come

The euro dropped sharply last week. And this week, the euro is forecast to drop more as the market waits on the launch of sovereign bond buying on Thursday by the European Central Bank (ECB).  The January Eurozone inflation rate plunged into a negative territory last week, stoking the ECB’s concern of a widespread deflation.

The ECB is expected to start buying €60 billion of sovereign bonds each month starting this week to help raise prices and avoid a Japan-like deflationary recession.  Of course, flooding the market with more euros will further erode the common currency value.  Therefore, most analysts are forecasting the common currency to trade below 1.1000 by the end of the month.

 

Bank of England may outdo the Fed

The pound slipped against the dollar on Friday but managed to find a broad support suggesting that the market remains bullish on the pound.  The Bank of England (BOE) will be meeting on Thursday to decide if it will continue its monthly bond purchasing that began in 2009.

Recent economic data has increasingly surpassed the market expectations.  And this has reawakened a prospect of a rate hike by the BOE this year.  In fact, some  analysts are suggesting that the BOE may raise the rates before the Fed and crowned the pound as the strongest among the G10 peers.

That said, the market will remain cautious ahead of the general election in May.  Meanwhile, traders will be keeping an eye on wage growth to see if low inflation and falling exports may tamper consumer spending in the coming months and persuade the BOE to remain dovish.

 

The loonie gets a temporary respite

Bank of Canada Governor Poloz provided a temporary respite for a much battered Canadian dollar last week when he indicated that another interest rate cut is not required at this time.  Supporting this view, the January inflation report showed that prices have not fallen as fast as the BOC had forecast.

That said, slumping oil prices and falling exports will continue to hold back the economy from posting strong growth figures.  Therefore, traders will be going over today’s February RBC Manufacturing PMI report to learn if slowing growth overseas is having increasing spillover effects at home.

The Bank of Canada’s rate decision on Wednesday.  Most analysts are not expecting a rate cut at this meeting.  Hence, if crude oil prices manage to break above $50 per barrel, then the loonie could firm up this week.

 

Aussie dollar forecast to even lower

The Aussie dollar is forecast to trend lower this week.  The market is anticipating the Reserve Bank of Canada to cut the cash rate by another 0.25 percent to 2.00 percent on Tuesday to counter falling commodity exports and rising unemployment.

A recent Bloomberg survey of analysts suggests that the Aussie dollar will remain under pressure and may go lower during the first half of this year.  However, this forecast is made with a key assumption that China continues to decelerate this year.

Therefore, it is no surprise that the Aussie dollar opened a tad stronger overnight on the news that the People’s Bank of China cut its benchmark deposit and loan interest rates by 0.25 percent in a bid to stimulate waning growth.