Dollar Outlook Remains Positive as New Week Begins

November 08, 2021
  • The U.S. Treasury will sell $56 bln of 3-year notes today; U.S. rates have fallen since the FOMC decision; Chile reported higher than expected October CPI
  • The ECB debate about inflation continues to rage; markets are still digesting last week’s shock decision from the Bank of England
  • China posted a huge upside surprise in its export figures

Measures of cross-market implied volatility picked up a bit after Friday’s strong payrolls data, but only the Treasury market MOVE index remains above its 1-year average. The MOVE index fell sharply over the previous session to around 65 after reaching the highest level since the start of the pandemic at the start of the month (78). FX vol across G7 pairs remains subdued around the 6% level, while the VIX increased slightly to around 17%, but well below its 1-year average of 22.5%.

The dollar outlook remains positive as the new week begins. After trading at a new cycle high near 94.62 Friday, DXY is on track to test the September 2020 high near 94.742. After that, there really aren't any major chart points until the June 2020 high near 97.802. A similar dynamic holds for the euro, which remains heavy after the unsuccessful test Friday of last month's cycle low near $1.1525. A clean break below would target the June 2020 low near $1.1170. The 2-year US-German differential has risen to 116 bp, the highest since March 2020, and points to further euro losses. Sterling tested its September low near $1.3410 Friday, where support held. A clean break below would set up a test of the December 2020 low near $1.3135. USD/JPY remains stuck below 114 but should eventually participate in the dollar rally as U.S. rates move higher.


The case for a stronger dollar was unequivocally made last week. The Fed started tapering, the U.S. data remain strong, and the rest of the world doesn’t look so great. To top things off, Congress was finally able to pass the traditional infrastructure bill Friday, which means significant fiscal stimulus is in the pipeline now. The U.S. economy should post a strong rebound in Q4, with the Atlanta Fed’s GDPNow model tracking 8.5% SAAR growth vs. 2.0% in Q3.

With the FOMC out of the way, Fed speakers will fan out this week to spread the message. Clarida, Powell, Harker, Bowman, and Evans speak today. While the Fed has taken pains to stress that tapering does not translate to tightening sooner rather than later, the market still does not entirely believe it. The market now sees nearly 45% odds of Q2 lift-off, down from over 55% last week, while odds of Q3 lift-off have remained near 100%.

 The U.S. Treasury will sell $56 bln of 3-year notes today. At the previous 3-year auction, indirect bidders took 44.2% while the bid/cover ratio was 2.36. All told, $120 bln of long-term securities will be sold this week and will be the first test for the market after tapering was announced. Will foreign demand show up? Or will investors wait for more attractive yields? More importantly, can the bond market continue to shake of higher inflation readings? The U.S. reports October PPI tomorrow and CPI Wednesday and readings are expected to remain very elevated. Stay tuned.

Paradoxically, U.S. rates have fallen since the FOMC decision. Despite the strong U.S. data reported throughout the week, yields actually ended last week significantly lower. Yes, some of this was the Bank of England effect, but that shouldn’t have long-lasting impact on U.S. rates. The U.S. 2-year yield is now trading around 0.43% after ending the week at 0.40% vs. the 0.56% peak October 28, while the 10-year yield is trading around 1.48% after ending the week at 1.45% vs. the 1.70% peak October 21. With growth strong and wages and inflation still rising, it’s hard to make a case for lower U.S. rates.

Chile reported higher than expected October CPI. Headline inflation came in at 6.0% y/y vs. 5.6% expected and 5.3% in September. This is the highest since January 2009 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike to 0.75% in July, then followed up with a 75 bp hike in August and a 125 bp hike in October to bring the policy rate up to 2.75%. The last two were both hawkish surprises. Next policy meeting is December 14 and another big hike is expected then. Of note, swaps market is pricing in 275-300 bp of tightening over the next twelve months. October trade data will be reported later today.


The ECB debate about inflation continues to rage. ECB Chief Economist Lane stressed that the bank must not overeat to a temporary rise in inflation, adding that price pressures are expected to fall next year. He added that this current period of high inflation is very unusual and not chronic as it was in the 1970s and 1980s. Next policy meeting is December 16 and a decision on QE is expected then. If the data continue to come in weak, then the doves will have a strong case for extending QE after PEPP ends in March. Of note, swaps market is now pricing in 8 bp of tightening over the next twelve months, which is quite a turnaround from the 20-25 bp of tightening that was expected after the October 28 ECB decision.

Markets are still digesting last week’s shock decision from the Bank of England. We suspect BOE officials will continue with damage control efforts this week. Bailey speaks today. WIRP suggests close to 50-50 odds for a hike at the next policy meeting December 16, but is fully priced in for February 3. The bank will have to work hard to regain its credibility in the coming months.


China posted a huge upside surprise in its export figures. Exports rose 27.1% y/y in October, well above the 20.3% expected, while imports disappointed at “only” 20.6% y/y. The result was a massive beat of the trade balance at $84.5 bln vs. $64.0 expected. This compares with a 5-year trade surplus average of around $40 bln. The only conclusion we can make here is that the many headwinds (energy shortage, supply bottlenecks, etc.) are being more than offset by robust external demand. On the other hand, weaker imports validate market assumptions that domestic demand is struggling to keep up. The PBOC injected another RMB 90 bln into markets today.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction