The Dollar Remains Stable as Unstable Markets await for Payroll Data
The dollar index remained stable on Friday, a rare sign of calm in turbulent global markets ahead of critical US payrolls data later in the day, while the yen fell as the Bank of Japan maintained its stimulus levels.
The dollar surged as high as 0.64% versus the yen following the Bank of Japan's decision to keep policy unchanged in Governor Haruhiko Kuroda's final policy meeting before stepping down in April. It was last up 0.5% at 136.79.
While most market participants expected the "no surprises" decision, many consider the days of the BOJ's bond yield curve control (YCC) as numbered, leading some to price in a low probability of a policy adjustment at Kuroda's penultimate policy meeting.
There was also a lot going on in markets worldwide, with European and Asian banking stocks falling a day after U.S. bank shares fell as tech-industry lender SVB Financial Group started a share sale to shore up its balance sheet owing to dwindling deposits from companies fighting for capital.
Some investors were concerned that it might signal deeper stress in the US financial sector, which drove down US and European government bond rates dramatically.
Despite lower US rates, the dollar's safe-haven reputation helped it hold firm, with the dollar index slightly altered at 105.17, while the index's biggest component, the euro, was also unchanged at $1.0587.
"(The developments in the banking sector) and today's U.S. February employment data are generating dangerous cross-currents for FX markets," said Chris Turner, ING's regional head of research for the United Kingdom, Central and Eastern Europe, and the Baltic States.
"The first effect appears to be obvious: the announcement has spurred the deleveraging of open FX holdings. As a result, this year's darlings among the FX investing community, the Mexican peso and the Hungarian forint, have led losses in the EMFX market, with -2.2% and -0.8%, respectively."
"The G10 FX's performance has been more mixed, but it also makes sense. Higher-beta currencies, such as the Canadian dollar and Norwegian krone, have suffered minor losses. The Swiss franc has outperformed the US dollar "Turner continued.
The US dollar reached a five-month high against the Canadian dollar at C$1.386 and the Norwegian crown at 10.75 crowns. The dollar fell 0.57% versus the Swiss franc to 0.927, its lowest level in more than two weeks, after falling 0.92% the day before.
According to Deutsche Bank analysts, "if you think Fed Fund pricing is extremely near to or has already peaked, selling USDCHF is one of the finest expressions in FX."
Sterling rose roughly 0.5% against both the dollar and the euro after Britain's economy was revealed to have risen faster than predicted in January, easing worries of a recession.
EYE PAYROLLS
The emphasis now shifts to the carefully awaited nonfarm payrolls report later on Friday, the next big data point that might provide hints on the Fed's future monetary policy actions. It remains to be seen how the financial sector's instability will affect the Fed.
According to a Reuters poll of experts, nonfarm payrolls are expected to rise by 205,000 in February after rising by 517,000 in January.
According to data released on Thursday, the number of people submitting new applications for unemployment benefits jumped by the most in five months last week. The greenback paused its rapid climb as traders undid some wagers that US interest rates will increase far faster than originally anticipated.
According to CME's Fedwatch tool, futures pricing currently suggests a roughly 52% likelihood that the Fed will raise rates by 50 basis points this month, down from 70% before the data release.