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Week Ahead – NFP to Guide Yields, RBA Could be a Yawn, Pound Turns to UK Budget for Boost

As a new month starts, investors will have their eyes locked on the latest nonfarm payrolls numbers out of the United States amid an accelerating selloff in bond markets. The Reserve Bank of Australia’s policy meeting will be the only central bank gathering of the week but is unlikely to provide much excitement. Canadian Q4 GDP figures are also on the agenda but the upcoming output meeting by OPEC+ might matter more for the oil-dependent loonie. It will be somewhat of a dull few days in Europe, though the pound may find plenty to propel it even higher if UK finance minister Rishi Sunak delivers a giveaway budget as rumoured.

RBA meets as it struggles to contain yield jump

The Reserve Bank of Australia is not expected to announce any policy changes when it meets on Tuesday, having only just added an extra A$100 billion to its QE program. However, with the local dollar rocketing past the $0.80 mark and Australia’s 10-year yield soaring to two-year highs, policymakers will probably attempt to play down some of the optimism flying around and reiterate that the economy still needs plenty of support. The three-year yield, which the RBA wants to keep at 0.1%, has spiked above 0.15% several times over the past week.

It will therefore be vital for the bank to come across as dovish as possible. But even if it succeeds, it will be hard to keep the aussie down for too long when the Australian economy is almost certain to make one of the quickest recoveries from the pandemic among the advanced nations.

Aside from the RBA meeting, traders will be keeping a watch on the flurry of domestic data, including January building approvals and Q4 net exports on Tuesday, the Q4 GDP estimate on Wednesday and January retail sales on Thursday. The latest manufacturing PMIs out of China on Monday will also be important.

Although none of the data are likely to spur any big reactions, there could still be a downside risk to the aussie should the numbers predominantly underwhelm, souring the mood.

Loonie awaits OPEC+ decision, might shrug off Canadian GDP

GDP growth figures for the fourth quarter will be the sole highlight in Canada’s release schedule next week. Economic growth is expected to have moderated in the final months of 2020 as Canada experienced a surge in coronavirus cases during the period, prompting fresh lockdowns. Bank of Canada Governor Tiff Macklem recently tied the pace of the recovery to that of the vaccine rollout.

However, as far as investors are concerned, economic strength south of the border and the price for oil are the top priorities for Canada’s economic fortunes. Hence, even if Tuesday’s GDP print were to beat the forecasts, the Canadian dollar is facing a threat from a potential increase in oil output when the world’s major producers meet on Thursday.

The OPEC-led alliance is considering whether to ease the supply cut by 500,000 barrels per day, which would likely come in April if approved. However, given the modest size of the increase, what would be more crucial for oil-linked currencies is if OPEC+ signals that additional supply boosts are on the way.

If OPEC+ decides to raise output by only 500,000 bpd as is being predicted but is reluctant to commit to further hikes, there’s a good chance oil prices will remain on their current upward path. However, should members like Saudi Arabia feel more relaxed about loosening the curbs now that the vaccination progress globally and expected fresh fiscal stimulus in the US are lifting the demand outlook, that could spark a bit of a correction in the oil rally, which is looking overstretched.

Dollar, bond markets braced for NFP-induced volatility</