Actions speak louder than words for U.S. dollar traders who sent the greenback sharply higher after the Federal Reserve said the temporary change to the supplementary leverage ratio, or SLR, for banks “would expire as scheduled on March 31, 2021. The temporary change was made to provide flexibility for depository institutions to provide credit to households and businesses in light of the COVID-19 event.”
This means that banks will have to hold more capital or sell bonds, which is exactly what we saw despite speculation that this would be the central bank’s decision. Yet, Fed Chairman Jerome Powell was quick to remind investors that the recovery is far from complete, and so the Fed will continue to provide the economy with the support it needs for as long as it takes. Still, yields rose, stocks fell and the U.S. dollar soared. Contrary to what Powell said this week, the market believes the central bank has grown less dovish. With the pre-FOMC quiet period over, we may get a better sense of whether that’s the case when other policy-makers speak in the coming week.
The Japanese Yen traded higher against all of the major currencies with the exception of the greenback after the Bank of Japan’s adjustments to monetary policy. It “clarified” that 10-year rates have been able to move in a 25bp range. Previously, investors thought the range was 20bp. It also did away with its annual minimum target for equity purchases and announced that it would only buy ETFs linked to TOPIX not Nikkei 225. These steps were positive for the currency because they ease the central bank’s support for the economy.
Better-than-expected Canadian retail sales data failed to help the loonie avoid losses. Consumer spending dropped for the second month in a row, this time by 1.1%. Economists anticipated a larger 3% decline, but the headline number and spending excluding the autos figure showed a smaller contraction. The Australian dollar was one of the worst performers because retail sales fell 1.1%. Economists predicted an increase in spending but, unfortunately, demand remained weak.
Ahead of a busy week, sterling was hit the hardest by the rising U.S. dollar. PMIs, employment, inflation and retail sales numbers are due for release. We are looking for firmer numbers all around as vaccine rollout boosts confidence and economic activity. It is important to remember that many restrictions remained in place in February, so the upside surprises may be limited. The downtrend in EUR/USD remains intact ahead of Eurozone PMIs and the German IFO report next week. The outlook for the Eurozone is more challenging than the UK, with a slow vaccine rollout that is hampered by concerns about the AstraZeneca (NASDAQ:AZN) shot.