Dollar Firm as U.S. Rates Move Higher

April 04, 2022
  • This is a very quiet week for the U.S. in terms of data; U.S. yields have resumed moving in the dollar’s favor; another portion of the U.S. yield curve has inverted; Colombia central bank minutes will be released
  • ECB tightening expectations remain heightened after last week’s CPI shocker; Turkey reported March CPI
  • Japan officials are getting more concerned about the weak yen; the slowdown in China’s economy is likely to worsen

The dollar is firm as U.S. rates resume their move higher. DXY is up for the third straight day and is trading near 98.85. Last month’s cycle high near 99.418 should eventually be tested. The euro remains heavy despite heightened ECB tightening expectations (see below) as is testing support near $1.10. We still expect an eventual test of this month’s cycle low near $1.08. USD/JPY is moving higher again and is trading near 122.75. Despite rising official concerns (see below), we look for further yen weakness as it should eventually test last week’s high near 125.10. After that is the June 2015 high near 125.85. Sterling remains heavy as it continues to trade just above $1.31. We still look for an eventual test of last month’s cycle low near $1.30 as BOE messaging has tilted more dovish of late. Between the likely return of risk-off impulses and the even more hawkish Fed outlook for tightening, we believe the dollar uptrend remains intact.


This is a very quiet week for the U.S. in terms of data. Maybe that’s not so important, as last Friday’s jobs data clearly show the economy moving closer and closer to full employment. In turn, this should give the Fed confidence to tightening policy aggressively, with a 50 bp move widely expected at the next FOMC meeting May 3-4. Indeed, WIRP suggests over 80% odds of back to back 50 bp moves at the May 3-4 and June 14-15 FOMC meetings.

U.S. yields have resumed moving in the dollar’s favor. The 2-year yield traded today at a new cycle high near 2.49%. This led the 2-year differentials with Germany, Japan, and the U.K. to also make new cycle highs. This of course argues for further dollar strength against the euro, yen, and sterling. Elsewhere, the 10-year yield traded near 2.41%, up from last week’s lows but still short of the 2.55% cycle high from March 28. However, the real 10-year yield has risen to -0.42%, the highest since June 2020.

Another portion of the U.S. yield curve has inverted. With the 2-year underperforming the 10-year in terms of price, the 2- to 10-year curve is now around -7 bp, joining the 3- and 5-year curves in inverting. The more widely followed 3-month to 10-year curve is trading near 191 bp, just below the March 25 peak near 195 bp. Please see our recent piece here to see why we are not yet concerned about yield curve inversion in the U.S.

U.S. data releases are few and minor this week. February factory orders will be reported and are expected at -0.6% m/m. Elsewhere, Canada reports February building permits and are expected at 6.5% m/m. The Bank of Canada releases its Q1 business outlook survey. BOC tightening expectations are running hot after it started the cycle with a 25 bp hike to 0.5% earlier this month. WIRP suggests nearly 85% odds for a 50 bp hike at the April 13 meeting. Looking ahead, swaps market sees the policy rate at 3.0% over the next 24 months.

Colombia central bank minutes will be released. At last week’s meeting, the central bank delivered a dovish surprise and hiked 100 bp to 5.0% vs. 150 bp expected. The vote was 5-2 with the dissents in favor of a 150 bp move. Governor Villar said the bank needs to be cautious given uncertainty. March CPI will be reported Tuesday. Headline is expected at 8.49% y/y vs. 8.01% in February. If so, this would be the highest headline reading since July 2016 and further above the 2-4% target range. Next policy meeting is April 29 and another 100 bp hike to 6.0% seems likely. Swaps market sees the policy rate peaking near 8.75% over the next 12 months.


ECB tightening expectations remain heightened after last week’s CPI shocker. WIRP suggests liftoff July 21 is fully priced in. Swaps market is pricing in 100 bp of tightening over the next 12 months, with another 65 bp of tightening is priced in over the following 12 months. This still seems way too aggressive to us, especially in light of recent weakness in the real sector data. Since the last meeting, inflation data have missed to the upside while real sector data have largely missed to the downside. Next ECB decision is April 14 and the forward guidance then will be key. Elsewhere, Germany reported firm February trade data. Exports rose 6.4% m/m vs. 1.5% expected and -3.0% in January, while imports rose 4.5% m/m vs. 1.0% expected and -4.0% in January. This strength is unlikely to be maintained as we move through 2022.

Turkey reported March CPI. Headline came in at 61.14% y/y vs. 61.50% expected and 54.44% in February, while core came in at 48.39% y/y vs 47.10% expected and 44.05% in February. This is the highest reading for headline reading since March 2002 and moves further above the 3-7% target range. It will only get worse as PPI rose 115% y/y and after the government announced hikes to natural gas and electricity prices on Friday. There is a growing sense that President Erdogan may finally capitulate and allow the central bank to tighten. Swaps market and Bloomberg consensus both see the policy rate rising over the next 3 months. Despite high inflation, the lira has remained fairly stable in recent weeks, more from the lack of any foreign participation rather than from any improvement in the fundamentals.


Japan officials are getting more concerned about the weak yen. This time, it was Keiichi Ishii, Secretary General of junior coalition partner Komeito who said the Bank of Japan should pay close attention to exchange rates as a by-product of its ultra-loose policies. He acknowledged that “From the point of view of the economy, I understand why they are holding down interest rates. But the side effects of that are reflected in exchange rates. How far can the side effects be tolerated? If the yen goes too low, things will be tough, so I want the BOJ to pay close attention to exchange rates.” In one sense, this is a demonstration of the concept of the so-called “Impossible Trinity” that was popularized by Robert Mundell. In terms of an independent monetary policy, free capital flows, and a fixed exchange rate, a nation cannot have all three. Japan has the first two and so the exchange rate will find its own level.

For now, the Bank of Japan won the battle to maintain Yield Curve Control. The 10-year yield is trading near 0.21%, below the 0.25% limit under YCC. However, the struggle to contain JGB yields is by no means over, not when bond yields in the rest of the world continue to march higher. While last week’s spike in USD/JPY was an overreaction to the BOJ’s YCC operations, the direction for this pair remains clear with central bank divergence particularly strong here. A break above 123.65 is needed to set up a test of the March 28 high near 125.10.

The slowdown in China’s economy is likely to worsen. As of April 1, reports suggest 21 provinces now have high- or medium-risk regions that account for 78.4% of GDP as of April 1. This compares to 77.4% on March 23. PMI readings for March so far suggest the economy is in contractionary territory and it’s only going to get worse in April, it seems. Markets await more stimulus measures and to be quite honest, it’s unclear why policymakers are waiting so long.  

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